Freddie Mac

Aug. 9 (UPI) — President Donald Trump reportedly wants the U.S. government to sell Fannie Mae and Freddie Mac stock in a quest to move the mortgage finance companies from full federal control.

The initial public offering, which would be possible the largest in history, was first reported by The Wall Street Journal and later confirmed by CNN and The New York Times.

The outlets reported that the plans have not been finalized for Fannie Mae, which is short for Federal National Mortgage Association, and was created in 1938 as part of President Frank Roosevelt’s New Deal. Freddie Mac, which stands for Federal Home Loan Mortgage Corp., began in 1970 to further expand the secondary mortgage market.

An IPO of up to 15% of Fannie Mae and Freddie Mac could raise $30 billion, according to the media outlets.

The New York Times reported that Trump met with executives from the nation’s largest banks — Jamie Dimon of JPMorgan, David Solomon of Goldman Sachs, Brian Moynihan of Bank of America and Jane Fraser of Citigroup. He asked them to come up with a way to sell shares on the stock market. The companies represent a big portion of the $12 trillion mortgage market.

Wall Street investors also met with Treasury officials, the New York Times reported.

Trump has wanted to privatize the companies since his first term in the White House.

“I am giving very serious consideration to bringing Fannie Mae and Freddie Mac public. …. Fannie Mae and Freddie Mac are doing very well, throwing off a lot of CASH, and the time would seem to be right,” he posted on Truth Social on May 22.

Federal Housing Finance Agency, which currently controls the two companies, has been headed since March by Bill Pulte, the grandson of the founder of PulteGroup, a residential and home construction company. He, too, has favored selling stock in the companies, but has said they should remain under the federal conservatorship.

With interest rates relatively high, CNN reported that some analysts fear the privatization would hurt the mortgage market. This could make it even more expensive to borrow money to buy a new home with high sale prices.

In 2024, Mark Zandi, the chief economist at Moody’s Analytics, estimated privatization would boost the average mortgage by an extra $1,800 to $2,800 each year.

Before the 2008 Great Recession, the companies were private and only backed by the U.S. Treasury, but were placed under what was planned as a temporary government conservatorship.

The market crash was caused as relaxed lending standards fueled banks giving subprime loans to people with poor credit who should not have qualified, and required a $187 billion government bailout to prevent lenders from filing for bankruptcy and a potential crash of the economy.

Fannie and Freddie buy mortgages from lenders and repackage them for investors in a way to keep mortgages more affordable, in addition to guaranteeing bond investors that they will help out if too many borrowers default.

The role has kept mortgage rates relatively low and stabilized the 30-year fixed mortgage, the national rate for which currently stands at around 6.58%.

Jaret Seiberg, a financial services and housing policy analyst at TD Cowen Financial, told CNN in May that the spinoff might not happen until late 2026 or early 2027.

The Treasury Department holds about 80% of the common stock and also has senior preferred shares. Investors Bill Ackman and John Paulson, who endorsed Trump for president, bought shares several years ago with the hope the government would sell stock, according to the Journal and the Times.

The movie “The Big Short” — dramatizing the reckless behavior in the banking and mortgage industries that contributed to the 2008 financial crisis — captures much of Wall Street’s misconduct but overlooks a central player in the collapse: the federal government, specifically through Fannie Mae and Freddie Mac.

These two government-created and government-sponsored enterprises encouraged lenders to issue risky home loans by effectively making taxpayers co-sign the mortgages. This setup incentivized dangerous lending practices that inflated the housing bubble, eventually leading to catastrophic economic consequences.

Another critical but overlooked factor in the collapse was the Community Reinvestment Act. This federal law was intended to combat discriminatory lending practices but instead created substantial market distortions by pressuring banks to extend loans to borrowers who might otherwise have been deemed too risky. Under threat of regulatory penalties, banks significantly loosened lending standards — again, inflating the housing bubble.

After the bubble inevitably burst, Fannie and Freddie were placed under conservatorship by the Federal Housing Finance Agency. The conservatorship imposed rules aimed at preventing future taxpayer-funded bailouts and protecting the economy from government-fueled market distortions.

Now, President Trump’s appointee to lead that agency, Bill Pulte, is considering ending this conservatorship without addressing the core structural flaw that fueled the problem in the first place: implicit government guarantees backing all Fannie and Freddie mortgages. If Pulte proceeds without implementing real reform, taxpayers on Main Street are once again likely to be exposed to significant financial risks as they are conscripted into subsidizing lucrative deals for Wall Street.

Without genuine reform, the incentives and practices that led to the crisis remain unchanged, setting the stage for a repeat disaster.

Pulte’s proposal isn’t likely to unleash free-market policies. Instead, it could further rig the market in favor of hedge funds holding substantial stakes in Fannie and Freddie, allowing them to profit enormously from the potential upside, while leaving taxpayers to bear all the downside risks.

A meaningful solution requires Fannie and Freddie to significantly strengthen their capital reserves. The two government-sponsored enterprises still remain dangerously undercapitalized. A report from JP Morgan Chase describes it this way: “Despite steady growth in [their net worth], the GSEs remain well below the minimum regulatory capital framework requirements set by the Federal Housing Finance Agency in 2020.” Imposing robust capital requirements similar to those that govern private banks would oblige the two enterprises to internalize their risks, promoting genuine market discipline and accountability.

Further reforms should address transparency and oversight. Enhanced disclosure standards would allow investors, regulators and the public to better assess risks. Additionally, limiting the types of mortgages these entities can guarantee could reduce exposure to the riskiest loans, further protecting taxpayers. Implementing clear rules that prevent Fannie and Freddie from venturing into speculative financial products would also mitigate potential market distortions.

Critically, the federal government must clearly communicate that future bailouts are not an option. Explicitly removing government guarantees would compel Fannie and Freddie to operate responsibly, knowing that reckless behavior will lead to their insolvency, not to another taxpayer rescue. Clear legal separation from government backing is essential to prevent moral hazard.

The combination of government guarantees, regulatory pressure from policies such as the Community Reinvestment Act and inadequate capital standards created the perfect storm for the 2008 financial crisis. Ignoring these lessons and repeating past mistakes would inevitably lead to a similar disaster.

Proponents of prematurely releasing Fannie and Freddie argue that market conditions have changed and risk management has improved. Yet, history repeatedly demonstrates that without structural changes, financial entities — particularly those shielded by government guarantees — inevitably revert to risky behavior when market pressures and profit incentives align. Markets function best when participants bear the full consequences of their decisions, something impossible under the current structure of these government-sponsored enterprises.

Ultimately, the only responsible approach is removing taxpayers from the equation entirely. Fannie Mae and Freddie Mac should participate in the mortgage market only as fully private entities, without any implicit government guarantees.

The American public doesn’t need a sequel to “The Big Short.” The painful lessons of the 2008 crisis are too recent and too severe to be ignored or forgotten. Market discipline, fiscal responsibility and genuine reform — not government-backed risk-taking — must guide our approach going forward. We can only hope that the Trump administration chooses fiscal responsibility over risky experiments that history has already shown end in disaster.

Veronique de Rugy is a senior research fellow at the Mercatus Center at George Mason University. This article was produced in collaboration with Creators Syndicate.