Recently, there has been a renewed push from policymakers in Washington to explore the privatization of the government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac. Given the importance of implied or direct government backing of the mortgage market and its benefits to the private sector, there appears to be little net benefit to fully privatizing the GSEs.

Fannie Mae and Freddie Mac play a central role in the US housing finance system. These GSEs were created to stabilize the mortgage market and promote homeownership and access to credit, particularly for low- and moderate-income households. The 2008 financial crisis marked a turning point when the GSEs were placed into federal conservatorship; however, in the years since, they have returned to profitability and repaid the Treasury in excess of the original bailout amount. Their continued operation under conservatorship has allowed for tighter oversight and risk-based pricing, which has helped protect taxpayers from future losses.

Households have also benefited from these GSEs. By providing liquidity and standardization in the secondary mortgage market, GSEs have helped keep mortgage rates lower than they might otherwise be — especially during periods of market stress, such as the Covid-19 pandemic. Their support for 30-year fixed-rate mortgages, in particular, has offered long-term affordability and stability for homeowners. Innovations in credit risk transfer and capital frameworks have further reduced systemic risk while maintaining broad access to mortgage financing.

Privatizing Fannie Mae and Freddie Mac would represent a fundamental shift in the US housing finance system. We see the major implications as follows:

• Higher Mortgage Rates: Privatized GSEs would lead to tighter credit standards and higher mortgage rates, as investors in agency mortgage-backed securities (MBS) demand higher yields to compensate for the reintroduction of mortgage credit risk. Current market data supports this concern; non-agency mortgage rates generally charge higher yields than loans underwritten to GSE lending standards. This could reduce access to affordable home financing, especially for first-time buyers and underserved communities.
• Increase Home Price Volatility: The housing market could experience increased volatility in the absence of a government-backed stabilizing force. During economic downturns, the GSEs have historically played a countercyclical role by continuing to provide liquidity when private capital retreats. Privatization could weaken this function unless alternative mechanisms — such as a government mortgage insurance fund or a public utility model — are put in place.
• Protracted Timeline: The timeline to disentangle the GSEs from the Treasury would be lengthy and potentially problematic. The process depends on the political will and regulatory changes involved. Privatization will require coordination between the Federal Housing Finance Agency (FHFA), the Treasury, and potentially Congress for legislative approval. Coordinated action across multiple layers of the federal government would likely span multiple presidential terms.
• Recapitalization: While privatization would result in funds potentially flowing to the US Treasury via the equity sale of the GSEs, a significant amount would be required to recapitalize the now-private entities. The GSEs have been allowed to retain earnings since 2019 to begin rebuilding capital buffers. However, under current capital requirements set by the FHFA, both Fannie and Freddie would need to accumulate roughly $250 billion dollars in capital to meet the thresholds required for safe operation outside of conservatorship. This process alone could take 5 to 7 years through organic earnings growth.
• Government Backstop Could Remain: Privatization could, in theory, transfer risk from taxpayers to private shareholders and creditors. However, without a clear and credible resolution framework, taxpayers may still assume some level of government support in a crisis, potentially limiting the fiscal benefits. Moreover, if privatized entities were to face financial distress, the government might still feel compelled to intervene, similar to 2008.

The push to privatize Fannie Mae and Freddie Mac may generate headlines, but in reality, the implications are clear: the risks tied to full privatization outweigh the potential rewards. The GSEs have played a key role in keeping mortgage markets liquid and stable, especially during downturns. Their current conservatorship model has allowed for tighter oversight and steady returns without exposing taxpayers to undue risk. Privatization could lead to higher mortgage rates, tighter credit, and more market volatility. The long and uncertain path to privatization combined with the likelihood of continued government involvement in a crisis also add to the complexities around privatization.

For now, the more compelling investment thesis lies in monitoring how the GSEs evolve within the current framework, rather than positioning for a full exit from government control. We maintain a constructive view on agency MBS, given the continued support from the GSEs and the structural benefits they provide to the housing finance system.

 

Disclosures: This is for informational purposes only and is not intended as investment advice or an offer or solicitation with respect to the purchase or sale of any security, strategy or investment product. Although the statements of fact, information, charts, analysis and data in this report have been obtained from, and are based upon, sources Sage believes to be reliable, we do not guarantee their accuracy, and the underlying information, data, figures and publicly available information has not been verified or audited for accuracy or completeness by Sage. Additionally, we do not represent that the information, data, analysis and charts are accurate or complete, and as such should not be relied upon as such. All results included in this report constitute Sage’s opinions as of the date of this report and are subject to change without notice due to various factors, such as market conditions. Investors should make their own decisions on investment strategies based on their specific investment objectives and financial circumstances. All investments contain risk and may lose value. Past performance is not a guarantee of future results.

Sage Advisory Services, Ltd. Co. is a registered investment adviser that provides investment management services for a variety of institutions and high net worth individuals. For additional information on Sage and its investment management services, please view our web site at sageadvisory.com, or refer to our Form ADV, which is available upon request by calling 512.327.5530.

The US housing market remains in a state of inertia. Despite the arrival of the spring selling season, both new and existing home sales continue to underwhelm. In April, existing home sales fell to an annualized pace of 4 million units — down 2% from a year earlier and well below the pre-pandemic average of over 5 million. New home sales, while slightly more resilient, have also plateaued as affordability pressures mount.

 

 

 

 

 

 

 

 

 

 

 

 

Source: Sage, National Association of Realtors

Mortgage rates are a key factor. As of late May, the average 30-year fixed mortgage rate remains near 6.84%, a level that has persisted for months. These elevated rates have created a lock-in effect: homeowners with sub-4% mortgages are reluctant to sell, while buyers face higher monthly payments and tighter credit conditions.

 

 

 

 

 

 

 

 

 

 

 

 

Source: Sage, Bankrate.com

The result is a market with limited inventory and muted activity. Even though active listings have increased year-over-year, total inventory remains 16% below pre-pandemic levels. Home prices, meanwhile, are showing signs of softening. Zillow now expects national home values to decline by 1.4% in 2025 — a modest but notable shift after years of rapid appreciation.

Sentiment reflects this cooling. A Q1 2025 Realtor.com survey found that nearly two-thirds of prospective buyers expect a recession within the next year. While some see that as a potential buying opportunity, many remain cautious — concerned about job stability, credit access, and the risk of overpaying in a market that feels increasingly uncertain.

Even as the housing market remains subdued, agency mortgage-backed securities (MBS) have emerged as a bright spot, drawing investor attention due to their evolving risk profile and attractive valuations.

Agency MBS are bonds backed by pools of residential mortgages and issued by government-sponsored enterprises (GSEs) such as Fannie Mae, Freddie Mac, and Ginnie Mae. These securities are considered to carry minimal credit risk due to their implicit or explicit government backing. However, they are still subject to other forms of risk — primarily interest rate risk and prepayment risk.

In a typical environment, prepayment risk is a major consideration. When interest rates decline, homeowners often refinance at lower rates, causing MBS to prepay earlier than expected. As a result, investors receive their principal sooner and are typically forced to reinvest at lower yields. But in today’s high-rate environment, refinancing activity has slowed dramatically. This has reduced prepayment volatility and made the cash flows from agency MBS more predictable.

At the same time, spreads on agency MBS remain elevated. This is partly due to a shift in demand dynamics. The Federal Reserve, once a major buyer of MBS during its quantitative easing programs, has been reducing its balance sheet. Commercial banks — another traditional source of demand — have also pulled back following the regional banking stress of 2023. With fewer natural buyers in the market, spreads have widened relative to historical norms, and are even considered cheap relative to corporate bonds in an environment of higher earnings uncertainty.

Adding another layer of complexity is the renewed discussion around the potential privatization of government-sponsored enterprises (GSEs) under the Trump administration. President Trump has recently stated that he is giving “very serious consideration” to taking Fannie Mae and Freddie Mac public. While this idea has surfaced before, past efforts to privatize the GSEs have faced significant legal, political, and logistical hurdles. The conservatorship structure, in place since 2008, has proven difficult to unwind, and many in the housing and financial sectors remain skeptical that a full privatization can be executed without disrupting the mortgage market.

Nonetheless, President Trump has emphasized that any move toward privatization would retain the implicit government guarantee that underpins the stability of agency MBS. That assurance may help temper market volatility, but the path forward remains uncertain.

 

 

 

 

 

 

 

 

 

 

 

 

Source: Sage, Bloomberg

In a fixed income landscape where high-quality yield is increasingly scarce, agency MBS stand out for their relative value. Despite carrying no credit risk, current coupon MBS are trading at spreads well above historical averages — offering a meaningful pickup over comparable-duration Treasuries. Importantly, these elevated spreads are not being driven by deteriorating fundamentals. Prepayment risk has diminished in the current rate environment, and the underlying credit quality remains strong due to the government-sponsored nature of the issuers. In a market starved for high-quality yield, agency MBS offer a rare combination of stability, attractive spreads, and reduced volatility — making them a compelling option for income-focused investors navigating today’s uncertain environment.

 

Disclosures: This is for informational purposes only and is not intended as investment advice or an offer or solicitation with respect to the purchase or sale of any security, strategy or investment product. Although the statements of fact, information, charts, analysis and data in this report have been obtained from, and are based upon, sources Sage believes to be reliable, we do not guarantee their accuracy, and the underlying information, data, figures and publicly available information has not been verified or audited for accuracy or completeness by Sage. Additionally, we do not represent that the information, data, analysis and charts are accurate or complete, and as such should not be relied upon as such. All results included in this report constitute Sage’s opinions as of the date of this report and are subject to change without notice due to various factors, such as market conditions. Investors should make their own decisions on investment strategies based on their specific investment objectives and financial circumstances. All investments contain risk and may lose value. Past performance is not a guarantee of future results.

Sage Advisory Services, Ltd. Co. is a registered investment adviser that provides investment management services for a variety of institutions and high net worth individuals. For additional information on Sage and its investment management services, please view our web site at sageadvisory.com, or refer to our Form ADV, which is available upon request by calling 512.327.5530.