The U.S. debates what to do about Fannie and Freddie, after their 17 years in government conservatorship

Published in Spring 2025 Housing Finance International Regional round up: news from around the globe

For international observers to understand the U.S. housing finance system, they must understand Fannie Mae and Freddie Mac. To understand Fannie and Freddie, they must understand how huge and how completely intertwined with the government these giant mortgage finance companies are.

As for huge, between them, Fannie and Freddie have US$ 7.7 trillion in assets – that is “trillion” with a T. This is composed of $4.3 trillion for Fannie and $3.4 trillion for Freddie.[1] They are by far the most important factors in the $14 trillion U.S. residential mortgage system and the main thing that makes the U.S. system unique in the world.

As for intertwined, Fannie and Freddie still have some private shareholders, but they are primarily owned by the U.S. Treasury Department, which as of December 31, 2024 holds senior preferred stock in them with a liquidation preference of $341 billion, or about 2.5 times their combined book equity. In other words, without this government investment, Fannie and Freddie would be insolvent. As part of the Treasury’s bailout of Fannie and Freddie in 2008, they were put in and remain in government conservatorship, which means subject to total government control.

In addition, also arising from the bailout, the Treasury owns warrants giving it the right to purchase at the exercise price of one-thousandth of a cent per share – that is, to get basically for free – enough new shares to give the Treasury a 79.9% share of the common stock of both companies. Why 79.9%? Because at 80%, the government would have to consolidate Fannie and Freddie’s debt on its books, a bookkeeping outcome the Treasury does not like.

Exercising the warrants could give the Treasury a large profit, but the warrants expire in September 2028 – during the term of the current Trump administration. This creates a duty for the Treasury Department to do something to realize their value before they expire. The Treasury could sell the warrants, exercise the warrants and then sell the stock, or exercise the warrants and simply hold the common stock, just as it holds the senior preferred stock.

Some people view the expiration date of the warrants as an incentive to release Fannie and Freddie from their 17-year long conservatorship to some new status. The arrival of the Trump administration has started new debates about what should happen next.

An essential question in these debates, one which cannot be avoided, is the nature of the government guarantee that Fannie and Freddie will get in the future. In my opinion, there is no possible outcome that does not involve a government guarantee. With this in mind, we consider the essence of Fannie and Freddie and the historical evolution which brought the U.S. mortgage system to this complex problem in political finance.

Fannie and Freddie are thinly capitalized, even with the massive government investment in them. They have a combined $7.5 trillion in liabilities and bear more than half the mortgage credit risk of the whole country. This unwise concentration of risk is possible because every penny of it is effectively guaranteed by the Treasury. Investors in Fannie and Freddie’s obligations don’t have to worry about Fannie and Freddie’s high leverage or anything else about their financial risk – Fannie and Freddie’s mortgage-backed securities can be sold and traded by Wall Street firms all over the world based on the credit of the U.S. government and potential taxes on the American people.

Fannie started life in 1938 as simply a part of the government. Its debt was government debt and any profits it made accrued ultimately to the Treasury.

Thirty years later, in 1968, in a gigantic blunder in government finance, Fannie was turned into a “government-sponsored enterprise” (GSE). This was done to get a bookkeeping result: to get the debt of Fannie off the government books, as President Lyndon Johnson’s budget deficits ballooned.

To be a “GSE” means you have private shareholders, but you also have a free government guarantee of your debt. It was constantly claimed that this GSE guarantee was only “implicit.” Nonetheless, it was and is fully real. This was demonstrated by the $190 billion Treasury bailout of Fannie and Freddie in 2008. That bailout completely protected all their creditors, even – egregiously – holders of subordinated debt. Creditors of GSEs are always saved by the government, and everybody knows it.

In Fannie’s original 1938 form, the risk was public and the profit was public. In the GSE form, as Congressman J. J. Pickle of Texas sardonically observed in 1992, “The risk is 99% public and the profit is 100% private.”

Pickle’s point fully applies to the new Fannie and Freddie debates of 2025. The financial essence of a GSE is that the huge value of the free government guarantee is a gift to the private shareholders. This is obviously a bad idea, but a great many politicians have been convinced to support it. Might they be again?

Congress chartered Freddie to join Fannie as another GSE in 1971. The two became in time an exceptionally profitable dominating duopoly with soaring prices for their stock, because no private firm can compete with the free government guarantee of a GSE. They both, but especially Fannie, developed remarkable arrogance and Fannie was widely feared for its bully-boy tactics and political clout.

As the Book of Proverbs tells us, “Pride goeth before destruction and a haughty spirit before a fall.” As the housing bubble collapsed in 2008, Fannie and Freddie, having greatly expanded in bad loans, had their fall and their humiliation. The price of their stocks went down 99%. The Treasury bailed out all their creditors, foreign and domestic, and Fannie and Freddie, under complete government control, sent their profits to the Treasury. They had ceased to be GSEs and had been turned into “GOGCEs”: Government-Owned and Government-Controlled Enterprises. This is what they remain at present.

As GOGCEs, Fannie and Freddie now pay for their government guarantee by giving the Treasury all their profit in the form of increased value of the Treasury’s senior preferred stock. Should they be turned back into GSEs and again given their government guarantee for free?

Supporters of the idea claim this would be a “privatization.” But Fannie and Freddie would not be private companies if they once again had a free government guarantee and if once again “the risk was 99% public and the profit was 100% private.” This would not be a privatization, but a “re-GSEification” with the value of the government guarantee as a gift to the private shareholders. You can easily see why private shareholders would love this idea – and why taxpayers should not.

You can also easily see the required solution to this problem: in any proposed exit from conservatorship, Fannie and Freddie should pay an ongoing fair price to the Treasury for the guarantee which makes their business possible.

Setting that price is an unavoidable requirement in the Fannie and Freddie debates. Based on the model of U.S. deposit insurance for the largest banks, the price should be assessed on Fannie and Freddie’s total liabilities. Based on U.S. deposit insurance finances,[2] I estimate the minimum fee would be about 8 basis points (0.08%) per year. That would now cost Fannie and Freddie together about $6 billion per year – not expensive at all for the essential factor that allows their trillions in obligations to be easily sold and traded all over the world.

The fundamental principle is that Fannie and Freddie should never again get a free government guarantee.

[1] Fannie Mae and Freddie Mac Form 10-K filings, December 31, 2024.

[2] Federal Deposit Insurance Corporation, Annual Report 2023.