May 29, 2025 4:35:41 PM
The Role of Freddie Mac and Fannie Mae in the Mortgage Market
Freddie Mac and Fannie Mae have long been pillars of the U.S. mortgage market, playing crucial roles in expanding mortgage access. As government-sponsored enterprises (GSEs), their primary function is to create a secondary market for mortgages.
Financial institutions struggle to match the 30-year term of mortgages within their asset/liability management framework. When Fannie and Freddie purchase mortgages from issuers, they repackage the cash flows in the form of securities, typically taking the credit risk, and in some cases, dividing up the cash flows into structured products that meet the needs of different investors. For example, fixed-rate mortgages can be divided into floating-rate and inverse floating-rate investments by creating structured securities.
These institutions were conserved in the aftermath of the 2008 financial crisis, a temporary measure that has now extended for over a decade. The conservatorship aimed to stabilize the housing market and prevent further economic fallout.
In March 2025, William Pulte appointed himself chairman of both Freddie and Fannie, removing 14 board members which set the table for the prospect of a potential merger between the two companies. President Trump previously attempted to privatize the two orgs in 2019 but failed. In a series of posts and comments, the president made several allusions to reengaging the privatization.
Potential Implications of Privatization on Mortgage Rates
Privatization aims to curtail government involvement in the housing market and reduce regulations. This could result in stricter lending requirements and higher mortgage rates as the newly privatized entities seek to generate higher returns for their shareholders. There are also concerns that the privatized GSEs could take undue risks on par with what led them to be conserved originally. At the same time, the decrease in regulation could lead to the innovation of new types of products that serve more potential home buyers.
Analysts project that mortgage rates could increase by 25 basis points to 1 percent, assuming private investors replace the security provided by government backing. In the worst-case scenario, if the transition to private status is poorly managed, rates could climb even higher. However, these new risk premiums may subside after a few years as the market adjusts to the new landscape.
Challenges Credit Unions May Face Amid Privatization
Credit unions are likely to encounter several challenges if Freddie Mac and Fannie Mae are privatized. The process of unwinding the current organizations is complex and fraught with policy disagreements, posing significant implementation risks. Credit unions that partner with these GSEs to sell mortgages may face changing procedures and regulations, requiring them to adapt quickly to the new environment.
Moreover, the uncertainty surrounding the privatization process can weigh on consumer sentiment, making it harder for credit unions to attract new mortgage borrowers. The potential for higher mortgage rates could also impact affordability, leading to a decrease in loan origination volumes.
Opportunities for Credit Unions in a Privatized Landscape
Despite the challenges, privatization could open new opportunities for credit unions who largely hold mortgages on their balance sheets. If mortgage rates rise there may be an opportunity for wider profits depending on the credit union’s cost structure. Additionally, reduced regulations could pave the way for innovation in mortgage products. New products could allow credit unions to expand their offerings within their communities, enhancing their value proposition and deepening relationships.
As of now, we can only speculate on these potential challenges and opportunities as the future of Fannie and Freddie remains uncertain. Protecting your members in any scenario starts with a sound balance sheet strategy and interest rate risk program. ALCO meetings and ALM reports can often feel perfunctory, but careful review and discussion around assets and liabilities is critical in a rapidly changing environment.