By Ben Eisen and Veronica Dagher

The Trump administration wants to sell shares in two government-controlled companies that are crucial for getting a mortgage. First it needs to figure out what it wants the mortgage market to look like.

A public offering for Fannie Mae and Freddie Mac could raise money to help reduce the government deficit. President Trump has twice mentioned selling shares in recent days.

For home buyers and owners, the stakes are high. Some 40% of mortgages they signed up for last year were sold to Fannie and Freddie. These financial middlemen turn the mortgages into bonds to sell to investors with a guarantee of repayment. The investors send a steady stream of capital that makes home loans widely available.

The federal government took control of the two firms after they collapsed in 2008 and effectively turned them into arms of the government. It was meant to be temporary, but as the companies became less risky and even more central to the housing market, many came to believe the current system works well.

Selling shares to investors will require managing the risk of sending mortgage rates higher when home buying is already unaffordable. Here are some considerations:

What should be the relationship between government and the companies?

Before the 2008-09 financial crisis, Fannie and Freddie benefited from the market's presumption that the government would come to their rescue if they got into trouble, which is what ultimately happened in 2008. That came to be known as an "implicit guarantee."

Trump posted on social media that he wants to maintain this implicit guarantee if a share offering occurs. He didn't elaborate on what this would look like.

Laurie Goodman, institute fellow at the Urban Institute, said an implicit guarantee is the most straightforward way to try to proceed with a share offering, since the two companies already effectively operate with one.

The companies have lines of credit with the Treasury Department totaling $254 billion, and the market assumes the government would step in if those lines were exhausted in an emergency. The companies could continue to operate privately with those lines, assuming the government figures out how much to charge for them.

Other ways of handling the guarantee might be thornier. Explicitly giving Fannie and Freddie full government backing would require difficult-to-pass legislation. Reducing government support might lead to higher mortgage rates.

Goodman and others say keeping Fannie and Freddie in conservatorship is the most probable outcome.

Bill Pulte, head of the Federal Housing Finance Agency, which regulates Fannie and Freddie, recently floated a novel idea of keeping the two companies under government control while conducting a share offering. "We are closely studying taking them public while in conservatorship," he said in a statement without providing additional details.

How would the risks be managed?

After Fannie and Freddie collapsed, critics blamed the implicit guarantee, saying it encouraged the companies to take risks by privatizing their profits while socializing their losses.

Mark Zandi, chief economist at Moody's Analytics, said Trump's approach appears to be "going back to the future." If the implicit guarantee looks like it did before 2008, it would bring back memories of the financial crisis, he said.

Nowadays, it would be hard for Fannie and Freddie to engage in pre-2008-style risky behavior. There are new lending rules to make sure borrowers can afford mortgage payments. The companies lay off the risk from their mortgages in the private markets. And they don't have the large investment portfolios that were an albatross at the time.

Still, with the implicit guarantee, global investors would be more cautious in buying their mortgage bonds, Zandi said. This wariness could push mortgage rates up 0.20 to 0.40 percentage point for the average borrower through the business cycle, he said.

Who are Fannie and Freddie trying to serve?

The companies have generally served a swath of the population across low and high incomes. The paltry returns on some loans are subsidized by the meatier returns on others.

The administration will have to decide how wide or narrow the intended customer base should be.

If the companies are chasing maximum profits, they might seek a higher-end customer base and minimize their focus on first-time buyers.

Those buyers might instead turn to government programs like Federal Housing Administration-backed loans. That would potentially defeat the purpose of any efforts to take the companies out of government control, according to a paper Goodman published in April.

What should the companies look like?

Prospective buyers of Fannie and Freddie shares will want to know what they are getting. Are the companies effectively utilities with lower returns, or would they look like private firms with higher returns?

This is important for mortgage rates, which typically bake in the "guarantee fees" that Fannie and Freddie charge to back their loans. To achieve higher profits, they would increase fees, said Jim Parrott, a former Obama administration housing adviser. Mortgage rates would rise, especially for borrowers with lower credit scores, he said.

Here's how Goodman lays out the fees:

   -- Guarantee fees are currently about two-thirds of a percentage point on 
      average. 
 
   -- If investors treat the companies like utilities and demand a return on 
      capital of about 10%, the guarantee fees would rise to 0.76 percentage 
      point. 
 
   -- If investors treat the companies like true private-sector entities with a 
      return on capital of 13%, the guarantee fees would rise to 0.92 
      percentage point. 
 
   -- That doesn't include charges for government lines of credit that Fannie 
      and Freddie might incur if they were fully privatized. 

Write to Ben Eisen at ben.eisen@wsj.com and Veronica Dagher at Veronica.Dagher@wsj.com

(END) Dow Jones Newswires

May 31, 2025 21:00 ET (01:00 GMT)

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