The article I posted on April 2 addresses the possibility of Fannie/Freddy paying for the riskiness of their own business operations:
https://wolfstreet.com/2025/04/01/not-another-free-lunch-dont-let-fannie-and-freddie-turn-back-into-gses
The author used the FDIC as a reinsurance model and scaled it to the mortgage market. They found the fair cost of the government's guarantee is approximately 100% of these companies' profits. I.e. their total profits merely represent the gift of free reinsurance from the government to the shareholders (currently the government and the shareholders are one and the same). If you can think of a reinsurance company big enough to underwrite $7 trillion in MBSs, it would be even more expensive because they'd need to price their reinsurance to earn a competitive profit margin and mitigate the risk of a bad sequence of returns.
"Before joining AEI, Mr. Pinto was an executive vice president and chief credit officer for Fannie Mae until the late 1980s."
https://www.aei.org/profile/edward-j-pinto/His experience is wildly appropriate to the subject at hand, since he was in corporate leadership at Fannie Mae. But I disagree with the theory that anyone competing with treasury bonds needs to pay the U.S. government for how much their competition costs the government. Do banks need to pay, because they issue CDs which take away demand from Treasury bonds? What about corporate bonds, which compete with U.S. treasuries? I haven't seen this claim used anywhere, and I don't think it makes sense.
I don't think simply avoiding subprime would work to make the GSEs safe. Even with prime mortgages, it is now routine for homebuyers to put down only 3-5%. What ever happened to the traditional 20%? IDK. But with that little skin in the game, even high-credit, financially savvy buyers are incentivized by a dynamic where if the market goes up they enjoy massive leverage and if the market goes down they lose very little.
Yes, Fannie Mae's 2024 report also claims 3% (adjustable rate) or 5% (fixed) down payments. The amounts are higher for investment properties and second homes, which I think limits how much people can take advantage of the low down payments. Deciding if subsidizing home ownership is good is above my pay grade... President Bill Clinton championed it, and I haven't seen arguments against it.
https://singlefamily.fanniemae.com/media/20786/displayAn end to the mortgage subsidy would result in an end to the 15 and 30 year mortgages, much higher loan rates, and possibly a recalibration of home prices due to speculation not being as attractive. This would irritate a lot of home owning voters. Thus, a return to the pre-GFC privatized profits and socialized losses model was the only politically viable possibility for privatization.
That's a risk I haven't seen analyzed in detail. The article against it mentions costs, the article for it mentions investment returns.
The government would still stand behind Fannie Mae - it has to, with $7.7 trillion in assets. And Fannie Mae would pay for that guarantee.
Homeowners are very active voters, and if they hear about a change to mortgages in the U.S., I expect them to get very vocal, very quickly. That's a significant risk to this investment - the public reaction.
But if the government is going to underwrite the risk of the GSEs, why not keep them as publically owned corporations forever? At least that way their "profits" pay the government/taxpayer for the risk the government/taxpayer is taking, and eventually replenish the public coffers for the periodic catastrophic losses. There are the optics, for conservatives, of privatizing things and breaking up Big Government, but this comes at the risk of being blamed for resetting the dominoes that led to the GFC. The left, meanwhile, doesn't seem to have a coherent direction on this issue.
The article you mentioned earlier expects reinsurance of Fannie Mae's $7.7 trillion in assets would cost $4 to $24 billion/year, with the article estimating $9 billion/year. Fannie Mae's 2024 pre-tax profits were $36 billion, making the range of costs 11% to 67% of their revenue. The U.S. government would get that money, representing the risk of Fannie Mae holding $7.7 trillion in assets, and being backed by the government.
Leverage and fraud made the Great Financial Crisis (GFC) possible. Whenever subprime loans were aggregated, Moody's and S&P rated the credit risk as extremely low (AAA) - they weren't. These investments ran out of subprime loans to securitize, so they accepted anything - no income, no job, no verification. The fraud drove issuing of more subprime loans. Mix in leverage (CDOs and synthetic CDOs), and you have the GFC. Without leverage and fraud, it would have been a collapse of a small subprime mortgage market. But fraud expanded the subprime market ridiculously, and leverage made it into an economic collapse. Subprime loans, by themselves, didn't result in the GFC.
