From Bailout to Buyout: Trump’s $300 Billion Gamble with America’s Mortgage Giants

Introduction to Mortgage-Backed Securities

You may have heard of mortgage-backed securities (MBS) when learning about the 2008 global financial crisis. These mortgage-backed securities were among the main catalysts for the economic collapse. A mortgage-backed security is a bond that pools together hundreds or thousands of individual home mortgages. When an investor buys an MBS, they are essentially purchasing a portion of a large group of mortgage payments from across the country.

How MBS Function

The MBS process works as follows: A bank or mortgage lender originates home loans to borrowers, but instead of holding those mortgages on their balance sheet for extended periods (often 15-30 years), they sell them to government-sponsored enterprises (GSEs) or investment banks. These entities then bundle the mortgages together and merge them into one pool. This pool is used to create securities that represent claims on the cash flows from interest payments. When homeowners pay their mortgages (principal and interest), this money flows through to MBS investors who own portions of the pool.

For mortgage lenders, this securitization process provides access to greater liquidity. They can originate a mortgage and quickly sell it rather than tying up capital for long periods. This enables lenders to make more loans and profit from origination fees. For investors, MBS offer exposure to real estate markets, which are typically illiquid assets, and usually provide higher yields than government bonds while maintaining relatively low risk due to the underlying collateral.

The 2008 Crisis and MBS Failures

However, in 2008, during the global financial crisis, these MBS defaulted when millions of homeowners stopped paying their mortgages. This occurred due to fundamental flaws in the MBS system. Because banks could quickly sell mortgages, they had reduced incentives to carefully underwrite loans and ensure borrowers could repay their mortgages. Additionally, MBS issuers were paying credit rating agencies to assign AAA ratings to securities composed of subprime mortgage bonds, despite the high probability of default. This led to increasingly loose lending standards, with people having low creditworthiness and often minimal income verification being offered mortgages. As Michael Burry predicted, this system was a ticking time bomb. Once enough homeowners defaulted on mortgage payments, these MBS began to fail. As mortgage defaults rose, financial institutions holding large amounts of mortgage-backed securities faced severe losses and liquidity crises.

Fannie Mae and Freddie Mac: From Crisis to Conservatorship

Major institutions that experienced severe economic losses were Fannie Mae and Freddie Mac. As mentioned earlier, Fannie Mae and Freddie Mac purchased mortgages from banks. Like private banks, Fannie and Freddie pooled these mortgages and sold them to investors, giving them significant exposure to the housing market. When housing prices fell and homes were foreclosed upon, Fannie and Freddie experienced severe losses. They were subsequently bailed out by the U.S. government to prevent collapse. “Between November 2008 and March 2012, the Treasury bought $189 billion of senior preferred stock from the GSEs to cover their losses and ensure that they could continue to operate in the secondary mortgage market.”

These GSEs entered into conservatorship and were required to pay the government back through dividends. After the collapse, Fannie and Freddie rebuilt themselves, “guarantee[ing] more than 40% of single-family mortgage originations” and serving as “the primary source of mortgage liquidity when private capital fled the market.” “As of December 31, 2019, Fannie Mae and Freddie Mac had paid the Treasury a total of $301 billion in dividends during their conservatorships.” However, they remained trapped in a dependent relationship with the government, becoming profitable but unable to exit conservatorship.

Trump’s 2025 Privatization Announcement

On May 21, 2025, President Trump announced he is “giving very serious consideration” to bringing Fannie Mae and Freddie Mac public “in the near future” after consulting with Treasury Secretary Scott Bessent, Commerce Secretary Howard Lutnick, and FHFA Director Bill Pulte. Trump stated that “Fannie Mae and Freddie Mac are doing very well, throwing off a lot of CASH, and the time would seem to be right.”

A key figure in this decision is Bill Pulte, FHFA Director, who “was sworn in on March 14, 2025.” “Within days of his confirmation, he removed multiple board members from both companies and appointed himself chairman of both Fannie Mae and Freddie Mac.” He has plans for “bringing the 16,000 Fannie and Freddie employees back to the office and streamlining operations,” dubbing the companies “obese” and saying he wants to put them “on the treadmill.

Following Trump’s announcement, “shares of Fannie soared 51% for their strongest performance since August 2009, while Freddie jumped 42%” for its best day since September 2019. “Both stocks saw very heavy volume, pushing them higher than they’ve been since the housing crash in 2008.”

Expert Concerns About Mortgage Rate Increases

Some experts warn that privatization could lead to higher mortgage rates and increased risk for investors. “Moody’s economist Mark Zandi has estimated that without a government backstop of the two mortgage giants, mortgage rates could go up 60 to 90 basis points.” Currently, Fannie and Freddie are backed by the U.S. government, meaning they essentially carry the same risk level as Treasury bonds—the safest investment in the world. “Without that backing, these investments are somewhat riskier and would likely require a higher risk premium, meaning that rates would rise.” This increased risk premium for mortgages would cause rates to rise.

Experts predict that “mortgage rates could jump by 0.5 to 1 percentage point almost immediately following Fannie and Freddie privatization,” potentially pushing rates from the current “high 6% range” to “7.5% or even 8% in the first year.”

Political and Financial Motivations

Trump has indicated that if he takes Fannie and Freddie public, he would “continue overseeing the two enterprises even if their conservatorship ends,” saying the “U.S. Government will keep its implicit GUARANTEES.” The drive for privatization is motivated by ideological preferences for private markets and the massive financial windfall the government could receive. “Fannie and Freddie are worth $300 billion or more, according to some estimates,” and hedge fund manager Bill Ackman has called it “a good deal for taxpayers that could generate as much as $300 billion for the government” to support “the President’s ambitious tax cutting agenda.”

Challenges and Timeline

However, the move faces significant technical hurdles, as it could substantially increase mortgage costs for American homeowners at a time when housing affordability is already at historic lows. Democratic Senator Elizabeth Warren has warned against privatization, saying “the last thing we need is to privatize them in a way that rewards Wall Street while driving up housing prices for people already struggling to buy homes.”

“TD Cowen financial services and housing policy analyst Jaret Seiberg said he did not expect the Trump administration to attempt a spin-off until late 2026 or early 2027,” with the process likely taking multiple years to minimize market disruption.

Conclusion

The potential privatization of Fannie Mae and Freddie Mac represents a significant shift in U.S. housing finance policy. While it could provide substantial revenue for the government and align with free-market principles, the risk of higher mortgage rates during an affordability crisis presents a major challenge. The complexity of unwinding nearly 17 years of government control while maintaining market stability will require careful planning and execution.