Recently, Treasury Secretary Scott Bessent indicated that the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac) could potentially exit government conservatorship, contingent on the impact this would have on mortgage rates.

“Our primary focus is on tax policy, and once that is addressed, we will consider the possibility of releasing Fannie and Freddie from conservatorship. The key consideration will be any indication that such a release would lead to an increase in mortgage rates,” Bessent stated. He emphasized that any decision regarding the release would be based on ensuring long-term stability in mortgage rates.

The Historical Context of Fannie Mae and Freddie Mac

Fannie Mae and Freddie Mac were placed in conservatorship in September 2008 by the Federal Housing Finance Agency (FHFA) following substantial losses during the housing market collapse. This move was essential to maintain stability within the U.S. financial system, supported by a government bailout. Despite their current profitability, these entities remain under government oversight due to the framework established during the financial crisis.

Post-2008, the U.S. Treasury’s stake through senior preferred stock agreements means it controls a significant portion of their profits, although the common and preferred shares existing before conservatorship were not entirely eradicated. The stock values of both organizations surged following Donald Trump’s election, signaling optimism about potential changes to their conservatorship status.

Expert Insights on the Consequences of Ending Conservatorship

To better grasp the housing market ramifications linked to the potential end of this conservatorship, ResiClub consulted Mark Zandi, Chief Economist at Moody’s. Zandi has produced numerous reports evaluating the implications of such a shift.

Scenario Probabilities and Impacts on Mortgage Rates

Zandi outlined five distinct scenarios regarding the future status of Fannie Mae and Freddie Mac and their potential effects on mortgage rates:

1. Status Quo Maintained (65% probability):

   According to Zandi, the likelihood of maintaining the current conservatorship is the highest. He noted, “This has been effective since 2008. Advocates for privatization must justify the benefits of such a change.”

2. Release with Implicit Government Guarantee (20% probability):

   Zandi suggests that a release granting an implicit guarantee would invoke wariness from investors, likely raising mortgage rates by 20-40 basis points relative to the current state.

3. Full Release Without Any Guarantee (10% probability):

   Such a scenario could lead to a significant hike of 60-90 basis points in mortgage rates, as investor confidence would diminish without a government safety net.

4. Release with Explicit Government Guarantee (5% probability):

   A release featuring an explicit guarantee could result in a minor decline of up to 25 basis points in mortgage rates; however, achieving this legislatively remains a challenge.

5. Full Charter as Government Corporations (0% probability):

   The enactment of such a charter would yield the lowest mortgage rates possible but is deemed highly unlikely under current political dynamics.

Conclusion and Future Outlook

While there is a clear interest from the current administration to reconsider the conservatorship of Fannie Mae and Freddie Mac, there exists a measured awareness of mortgage rate fluctuations. Given Zandi’s analyses, it appears that cautious steps will continue to characterize any moves towards releasing these pivotal entities from government control, likely unfolding later in the current administration as concerns about mortgage rates are navigated.