Fannie Mae, Freddie Mac: Trump gets creative to bypass Congress

The Trump administration is reportedly developing a multi-step strategy to release Fannie Mae and Freddie Mac from federal conservatorship without requiring congressional approval. This approach would circumvent years of legislative stalemate over the future of the two government-sponsored enterprises that back nearly half of all U.S. mortgages.

The plan involves using the Federal Housing Finance Agency's existing authority to gradually reduce the Treasury Department's senior preferred stock holdings, which currently give the government sweeping control over the mortgage giants. Treasury Secretary Scott Bessent has reportedly been tasked with exploring options for recapitalizing the companies and returning them to private ownership.

Fannie Mae and Freddie Mac have been under government control since 2008, when they required a $187.5 billion bailout during the financial crisis. Since then, they have repaid the government and returned to profitability, yet remain in conservatorship. The Treasury holds senior preferred stock with a 10% dividend yield and warrants for 79.9% of the companies' common equity.

The administration's strategy could involve several mechanisms: reducing the dividend rate on Treasury's preferred shares, allowing the companies to retain earnings to rebuild capital, and eventually converting the warrants to common stock. This would effectively transfer control back to private shareholders while maintaining some government backstop for mortgage market stability.

Market implications are significant. Fannie and Freddie common shares surged on the news, with Fannie Mae stock jumping 35% and Freddie Mac climbing 40% in after-hours trading. The preferred stock of both companies also rallied, as investors bet on a path to exiting conservatorship.

However, the approach faces substantial legal and political risks. Critics argue that unilateral executive action could face court challenges, as Congress created the conservatorship structure and may need to authorize its termination. The 2008 Housing and Economic Recovery Act gave the FHFA broad powers as conservator, but didn't explicitly outline an exit strategy.

Financial analysts estimate that releasing Fannie and Freddie could require the companies to raise $100-200 billion in new capital to meet regulatory requirements and satisfy rating agencies. This capital raise would likely come through initial public offerings that could value the combined entities at hundreds of billions of dollars.

The move would also reshape the $11 trillion U.S. mortgage market. Currently, Fannie and Freddie guarantee about $5.2 trillion in mortgage-backed securities, providing liquidity that keeps mortgage rates lower than they would be without government backing. Any transition would need to preserve this function while reducing taxpayer risk.

Housing policy advocates warn that privatization could increase mortgage costs for borrowers, as the companies would need to charge higher guarantee fees to generate returns for shareholders and build capital buffers. The 30-year fixed-rate mortgage, a uniquely American product, depends heavily on the government-sponsored enterprise model.

The administration appears to be moving forward despite these complexities. The strategy represents a pragmatic attempt to resolve a policy issue that has stymied multiple presidents from both parties. By using existing executive authority rather than waiting for congressional action, the White House is betting it can achieve privatization through administrative means.

This approach mirrors other recent Trump administration strategies for achieving policy goals without legislation, particularly in areas where Congress remains divided. The success of this gambit will likely depend on how courts interpret the FHFA's statutory authority and whether Congress chooses to challenge the executive action through legislation or lawsuits.