Fannie Mae and Freddie Mac are two government-sponsored enterprises (GSEs) that buy mortgages from lenders, bundle them into securities, and sell them to investors. This process keeps mortgage money flowing and helps maintain lower rates, especially for traditional home loans.
Since the 2008 financial crisis, both companies have been in federal conservatorship, meaning the government took them over to stabilize the housing market. For the past 17 years, they have operated under federal control, with an implicit government guarantee supporting their loans.
Now, the federal government is moving toward privatizing them again, a shift that could happen as soon as late 2025. The plan would involve selling shares back to private investors through an initial public offering (IPO) and reducing or removing government backing.
Why This Is Happening
The 2008 government takeover was never meant to be permanent. Today, both companies are profitable, well-capitalized, and positioned to operate without federal control. They generate billions in annual profits, most of which currently go to the U.S. Treasury, and selling shares through an IPO could raise more than $30 billion while opening the door for private investors to share in those earnings.
There are also political and ideological drivers. Many policymakers believe the mortgage market should rely less on government guarantees, shifting risk back to the private sector and reducing taxpayer exposure.
The timing looks favorable as well. Mortgage demand remains strong, housing prices are high, and global investors are seeking yield, creating a potentially ideal environment for a large public offering. In addition, long-time shareholders who have held nearly worthless Fannie and Freddie stock since before 2008 see privatization as a chance to restore value to their investments.
Why This Matters
Privatizing Fannie Mae and Freddie Mac would be one of the most significant changes in the mortgage market in decades. Potential effects include:
- Loss of Full Government Guarantee – Without explicit backing, loans from Fannie/Freddie could be viewed as riskier.
- Higher Mortgage-Backed Security (MBS) Yields – Riskier assets typically must offer higher returns to attract buyers.
- Possible Increase in Mortgage Rates – If funding costs rise, rates could climb for both homeowners and investors.
How This Ties into DSCR Loans
You might think: “I use DSCR loans. Fannie and Freddie don’t affect me.”
Not exactly. Most DSCR loans are priced based on the 5-year or 10-year U.S. Treasury yield plus a lender’s spread. When Treasury yields rise, DSCR rates typically rise too.
The Typical Chain Reaction
- Privatization → MBS viewed as riskier.
- Investors demand higher yields on Fannie/Freddie MBS.
- Higher MBS yields put upward pressure on Treasury yields.
- Treasury yields rise → DSCR rates rise.
If Fannie and Freddie’s MBS yields rise, DSCR rates could follow, ranging from a small bump of around 0.125% to increases of 0.50% or more in a more extreme scenario. The exact impact is speculative and would depend on how markets respond to privatization.
The Alternative Scenario: Rates Could Fall
While less common, there is a chance DSCR loans could benefit. If DSCR-backed loans maintain lower default rates than traditional investor loans, note buyers and institutional investors could start favoring DSCR loan pools in the secondary market.
When demand for DSCR loans rises:
- Prices for DSCR loans increase.
- Higher prices mean investors accept lower yields.
- Lower yields for investors can lead to lower rates for borrowers.
In this case, privatization could make DSCR loans more competitive if agency loans appear riskier, narrowing or even flipping the rate gap between them.
What Real Estate Investors Should Do
- Consider locking in now – If you are planning to buy or refinance, today’s rates may be lower than they will be post-privatization.
- Review your portfolio financing mix – Know which loans are fixed and which are variable.
Stay informed – Policy changes to Fannie/Freddie can move markets and affect your bottom line.
Privatizing Fannie Mae and Freddie Mac could shift the entire mortgage market, including DSCR loans, by influencing Treasury yields. Understanding this connection helps you time your financing decisions and stay ahead of potential rate changes.
