With the Trump administration signaling that it intends to merge mortgage giants Fannie Mae and Freddie Mac and take them public before the end of the year, Senate Democrats want to know whether anybody has analyzed how that plan would affect mortgage rates.
The prospect that mortgage rates might go up is a concern shared by most voters — particularly Democrats and independents, but also among a majority of Republicans, a recent poll shows.
“You can help support lending affordability by pausing any efforts to reprivatize [Fannie and Freddie] and instead study the potential effects of reprivatization on the mortgage market to avoid raising costs on families and weakening the stability of the broader housing market,” Senators Elizabeth Warren, Chuck Schumer and Cory Booker wrote Federal Housing Finance Agency Director Bill Pulte Friday.
The letter cited a survey of 1,166 likely voters in June by progressive think tank Data for Progress, which showed most Americans are concerned that privatizing Fannie and Freddie might lead to higher mortgage rates — although Democrats and independents were more likely to be worried than Republicans.
Source: Data for Progress survey of 1,166 likely voters, June 20-21.
“If Fannie Mae and Freddie Mac are privatized, how concerned are you that mortgage interest rates could rise for homebuyers and housing developers?” the online survey, conducted on June 20 and 21, asked.
While 82 percent of Democrats and 73 percent of independent voters said they were “very” or “somewhat concerned” that privatizing Fannie and Freddie could mean higher rates for homebuyers and developers, that sentiment was shared by only 56 percent of Republicans.
Most Democrats (62 percent) and independent voters (52 percent) said they were “very concerned” mortgage rates could rise, compared to 28 percent of Republicans.
IPO plan shrouded in mystery
Shares in Fannie Mae and Freddie Mac soared on Aug. 8 on reports that the Trump administration is planning an initial public offering in the companies by the end of the year.
The plan would value the companies at $500 billion, with the government raising $30 billion, The Wall Street Journal reported, citing anonymous sources. A senior Trump administration official confirmed the report to Reuters.
Fannie and Freddie have been in government conservatorship since 2008, and privatizing them without an “explicit guarantee” that the government stands behind them could drive mortgage rates up by 60 to 90 basis points, Moody’s Analytics Chief Economist Mark Zandi estimated in June.
A basis point is one hundredth of a percentage point. So Zandi’s prediction is that simply cutting Fannie and Freddie loose might drive up mortgage rates by nearly a full percentage point because investors who buy mortgage-backed securities would demand higher risk premiums.
But Pulte, the head of Fannie and Freddie’s federal regulator, and Treasury Secretary Scott Bessent have signaled that rather than cutting Fannie and Freddie loose, the Trump administration might keep them in conservatorship and sweep the government’s ownership stake in the companies into a sovereign wealth fund.
Trump himself has said that the government intends to maintain an implicit, or unstated, guarantee of Fannie and Freddie’s obligations, and teased on Truth Social that it might merge them into a single entity, “The Great American Mortgage Corporation.”
Pershing Square billionaire Bill Ackman, whose firm has a large stake in the mortgage giants, maintains that merging Fannie and Freddie would help bring mortgage rates down.
A merger would enable the companies “to achieve huge synergies both in their operations and in the trading price and spreads of their [mortgage-backed securities], savings which could be passed along to consumers in the form of reduced mortgage rates,” Ackman claimed in an Aug. 10 post on the social media platform X.
Barry Habib — the founder and CEO of mortgage software platform MBS Highway, who was appointed to Fannie Mae’s board on July 21 — thinks an IPO could allow the government to sell off its stake in the companies in bits and pieces, generating “significant buckets of cash that could go towards things like reducing the debt and reducing the deficit, which then would actually help to bring interest rates down.”
Tax cuts provided by the “One Big Beautiful Bill Act” (OBBBA) will add more than $5.5 trillion to the national debt through 2034, according to an analysis by the Committee for a Responsible Federal Budget.
Because long-term interest rates for government bonds and mortgage-backed securities are determined by investor demand, that kind of borrowing could push bond yields and mortgage rates higher. The Budget Lab at Yale estimates that the Big Beautiful Bill will push yields on 10-year Treasury notes — a barometer for mortgage rates — up by 72 basis points by 2028, about 3/4 of a percentage point.
“While the OBBBA includes some sweeteners for certain homeowners, like the expansion of the state and local tax deduction cap to $40,000, the main long-term effect it promises for housing is just higher interest rates,” Windermere Real Estate Principal Economist Jeff Tucker wrote in an Aug. 26 Inman guest post.
Independent mortgage banks represented by the Community Home Lenders of America (CHLA) are opposed to merging Fannie and Freddie into a single entity, saying maintaining them as separate companies “is vital to competition and market accountability.”
While the prospect of a Fannie and Freddie IPO has dominated the headlines, Senate Democrats also scolded Pulte for accusations he’s leveled against Federal Reserve Chair Jerome Powell and Governor Lisa Cook, and presented him with a list of policy suggestions to pursue instead.
After being sworn in as FHFA director on March 14, Pulte purged Fannie and Freddie’s boards of directors and appointed himself chair of both companies. He’s issued a raft of orders aimed at curbing programs intended to boost lending in minority communities, protect borrowers from unfair or deceptive practices, and assess risks associated with climate change.
He’s also been a key player in the Trump administration’s bid to usurp the Fed’s independence — which skeptics say could backfire and push mortgage rates higher if bond markets revolt.
Senators Warren, Schumer and Booker on Friday urged Pulte to:
- Increase support for lending related to Fannie and Freddie’s affordable housing goals
- Support multifamily construction and rehabilitation lending
- Support fair housing and fair lending initiatives
- Increase the Federal Home Loan Banks’ (FHLBs) Affordable Housing Program (AHP) investments
- Transition to a bi-merge credit reporting system
As part of a plan to adopt more inclusive VantageScore 4.0 and FICO Score 10 T credit score algorithms this year, the FHFA under the Biden administration had proposed moving from tri-merge to bi-merge credit reporting, which would have allowed lenders to pull credit scores from two credit bureaus instead of three.
Pulte caught the mortgage lending industry by surprise on July 8, when he announced that the FHFA would allow lenders to use VantageScore 4.0, but continue to require tri-merge reports.
Requiring lenders to pull credit reports from all three credit bureaus is a costly, outdated relic that provides “scant tangible benefits,” Mortgage Bankers Association President Bob Broeksmit said on Aug. 6 in calling for the FHFA to put an end to the practice.
The FHFA did not respond to Inman’s request for comment.
Get Inman’s Mortgage Brief Newsletter delivered right to your inbox. A weekly roundup of all the biggest news in the world of mortgages and closings delivered every Wednesday. Click here to subscribe.
