From the Research Lab: The Future of Fannie Mae and Freddie Mac: Privatization, Conservatorship, and the Limits of Demand-Side Housing Policy
Hugh Frater ’85, former Chief Executive Officer of Fannie Mae, and David Benson, former President of Fannie Mae, joined Professor Brian Lancaster at Columbia Business School to discuss one of the unresolved questions in U.S. housing finance: How should Fannie Mae and Freddie Mac exit conservatorship, and who should ultimately own them?
by Brian Lancaster, Senior Lecturer in the Discipline of Finance, Columbia Business School
February 2026
While the discussion began with institutional history and market mechanics, it ultimately converged on a more fundamental issue—whether government-sponsored mortgage finance has meaningfully improved housing affordability, or whether it has primarily expanded leverage and inflated house prices. We also examined the current administration’s proposal to privatize the two GSEs and, while still a work in progress, found it to be more of a political opportunity for the administration to claim the largest IPO in history rather than a well thought out transition plan.
Nearly two decades after being placed into conservatorship during the Global Financial Crisis, the Government Sponsored Enterprises (GSEs) remain central to the U.S. mortgage system. They are operationally successful, systemically indispensable, and extraordinarily profitable. Yet, as the interview revealed, their prolonged limbo reflects ongoing confusion about the appropriate boundary between public policy and private capital in housing finance.
Origins, Scale, and Market Dominance
Fannie Mae was created in 1938 during the Roosevelt administration to revive a housing market devastated by the Great Depression. At that time, mortgages were short-term bullet loans, and widespread bank failures eliminated refinancing options, triggering mass foreclosures. The creation of the FHA and the secondary mortgage market—later embodied by Fannie Mae—introduced liquidity, standardization, and the long-term amortizing mortgage.
Although Fannie Mae was privatized in 1968 and Freddie Mac followed with a similar structure, the interview made clear that the GSEs now dominate U.S. housing finance in a way that is historically and globally unusual. The residential mortgage market totaled approximately $14.7 trillion at the end of 2025. Fannie Mae and Freddie Mac together account for roughly 46% of that market ($6.8 trillion), Ginnie Mae has about a 20% market share, and banks hold about 22%. Private-label mortgage securities, other non-depository institutions, and home equity lines of credit make up the rest.
By asset size, Fannie Mae and Freddie Mac are among the largest financial institutions in the United States—larger than most global banks. Their scale and role in guaranteeing the majority of US mortgages makes them not merely market participants, but essential pillars of the US economy.
Mechanics, Liquidity, and Monetary Policy
The discussion reviewed how the GSE system functions in practice. Borrowers originate mortgages through lenders, which then sell those loans to Fannie or Freddie. The GSEs pool mortgages into securities and guarantee their principal and interest, shifting investor concern from credit risk to prepayment risk. This transformation turns millions of idiosyncratic loans into highly liquid mortgage-backed securities (MBS).
As emphasized in the interview, the agency MBS market is the second most liquid fixed-income market in the world after U.S. Treasuries. This liquidity enables the Federal Reserve to transmit monetary policy directly into housing finance. During the financial crisis and the pandemic, the Fed’s ability to purchase implicitly US government guaranteed agency MBS, allowed it to lower mortgage rates and stabilize the housing market in a way that would have been impossible in a fragmented private market. Indeed, today the Trump Administration is proposing that the GSEs buy their own securities to the tune of $200 billion to reduce mortgage rates in an end run around the Federal Reserve.
Conservatorship and Its Unintended Permanence
The Global Financial Crisis exposed severe weaknesses at Fannie Mae and Freddie Mac. Both Frater and Benson acknowledged that prior to 2008, the GSEs were undercapitalized and mispriced for the mortgage default risk they insured. Pre-GFC, regulatory capital forced banks to hold 4% capital for residential mortgages on their balance sheets compared to a combined 2.05% (1.6% bank capital; 0.45% GSE capital) for mortgages guaranteed by Fannie Mae and held on balance sheet, leading to regulatory arbitrage. Also, in an effort to compete with the rapidly expanding private non-agency market, the GSEs expanded their portfolio holdings into riskier mortgages absorbing risks that ultimately proved destabilizing.
When housing prices collapsed, the GSEs’ capital was wiped out and the government placed the GSEs into conservatorship in September 2008. This action stabilized the system, but it was never intended to be permanent. Yet more than seventeen years later, conservatorship persists.
Ironically, the GSEs have been far more profitable under government control than before the crisis. Greater guarantee fees (G-fees} have generated tens of billions of dollars annually and returned more to the Treasury than the bailouts they received. Their business model shifted from portfolio-driven risk-taking to what Frater described as “the world’s largest insurance companies,” focused almost entirely on guarantee fees (“G-fees”).
Despite this operational success, the interview highlighted the structural dysfunction of the current arrangement. Shareholders have no meaningful rights, management answers to shifting political priorities and institutional objectives and governance resets with every administration. Conservatorship delivers stability, but at the cost of accountability, innovation, consistency, and strategic clarity.
Innovation, Product Design, and the Limits of Mortgage Engineering
The final part of the discussion turned to contemporary policy proposals aimed at affordability, including 50-year mortgages, assumable mortgages, and portable mortgages. Both Frater and Benson expressed skepticism that such innovations would meaningfully improve affordability.
A 50-year mortgage, while superficially appealing, would likely offer little payment relief once higher interest rates and reduced liquidity are priced in. Moreover, for the first two decades it would function much like an interest-only loan, dramatically increasing total interest paid by the homeowner while simultaneously slowing homeowner equity buildup and consequently increasing lender and GSE guarantor risk. From a market perspective, the speakers emphasized how difficult it is to build liquidity in new mortgage products. The existing 30-year mortgage market reflects decades of standardization and scale; scrapping it in favor of a 50-year product is implausible and adding it to the product mix could reduce liquidity in current markets.
Similarly, proposals to make existing Fannie and Freddie mortgages assumable as is the case with existing Ginnie Mae mortgages (to encourage homeowners with ultra low mortgage rates to sell thereby increasing supply) or portable were viewed as legally and operationally disruptive. Retrofitting assumability or portability onto trillions of dollars of outstanding MBS would likely trigger investor challenges and destroy liquidity in what is currently one of the world’s deepest fixed-income markets. While new assumable or portable products could theoretically be introduced, they would be originated at prevailing market rates and would need to charge extra for the extra optionality. This would limit their value as an affordability tool.
Affordability Is a Supply Problem, Not a Demand Problem
The most decisive insight from the discussion was the speakers’ rejection of demand-side solutions to housing affordability. Fannie Mae and Freddie Mac, by design, operate on the demand side of the market. Lower mortgage rates, longer terms, callability and expanded credit access all stimulate demand. But in a market characterized by chronic undersupply, such stimulus tends to raise prices rather than improve affordability.
As noted in the discussion, the United States has undersupplied housing on a per-capita basis for decades particularly in the wake of the GFC which wiped out many homebuilders and left many survivors cautious. At present the US is short between four to five million units nationally. This shortage has been exacerbated by NIMBYism, zoning restrictions, post-crisis underbuilding and, more recently, by reduced mobility as homeowners remain locked into 3 percent mortgages. In this environment, making credit cheaper simply intensifies competition for scarce homes for sale.
Both speakers argued that if government intervention is to be used, it should focus on the supply side—particularly lowering the cost of capital for developers building workforce housing and starter homes. Reducing construction financing costs and risks, streamlining and expanding programs such as HUD’s 223(d) financing, and accelerating construction loan approvals could meaningfully increase supply over time. Shifting the political debate from rent controls, which in the medium and longer term reduce the housing supply and diminish its quality, to loosening zoning and permitting requirements would also help greatly. These tools lie outside the traditional GSE charter, reinforcing the idea that mortgage finance reforms and privatization while politically appealing to some, alone cannot solve affordability and could reduce it in the medium and longer term.
The Ownership Question and the Case for Privatization
The interview concluded with a direct question: who should own Fannie Mae and Freddie Mac going forward and what did the speakers think of the current Administration’s proposal to “privatize the GSEs.” Hugh Frater articulated a clear bias toward private ownership. With only about 4 percent of the mortgage market truly private and roughly 96 percent subsidized directly or indirectly by the federal government, the system represents an enormous and persistent government intervention by and large on the demand side
The results of that intervention are sobering. Rather than making housing broadly affordable, the system has increasingly leveraged households and inflated asset values.
From this perspective, privatization is not just about eliminating government involvement and reducing tax payer risk but about restoring market discipline. Private ownership would force clearer pricing of risk, constrain balance sheet growth, and likely result in smaller, more consistently focused institutions over time rather than institutions whose objectives shift with the politics of each administration. Regulation, capital standards, and explicit public mandates could remain in place, but ownership—and therefore accountability and focus—would be clarified.
In terms of the Administration’s current proposal to privatize or, more likely partially privatize, Fannie Mae and Freddie Mac, both speakers thought that the current “plan” and its’ implications for the housing market, while still under discussion, were not well thought out in terms of its impact on affordability and the mortgage market were not well thought out in terms of its impact on affordability and the mortgage market. Rather, current proposals seem to represent a hasty political effort to garner the headline of the administration doing the largest IPO in history after the Saudi Aramco deal. Details on regulatory oversight, capital requirements, and the government’s ongoing role are unclear and there appear to be conflicts within the administration about what would be the best plan. Critics argue any privatization could increase mortgage rates and reduce market liquidity while proponents argue it would reduce tax payer risk and potentially increase market innovation, not unlike the breakup of ATT decades ago.
Conclusion
The discussion with Hugh Frater and David Benson makes clear that conservatorship has outlived its original purpose. While it stabilized housing finance and delivered remarkable profitability, it has also entrenched ambiguity, moral hazard, and policy drift. Mortgage innovation alone cannot solve affordability, and demand-side subsidies in a supply-constrained market risk doing more harm than good. Emphasis needs to be placed on supply side reforms that improve developer returns and risk while loosening zoning restrictions.
The best path forward is a reprivatization of Fannie Mae and Freddie Mac—one that recapitalizes the enterprises, restores shareholder rights, preserves explicit public objectives, and reintroduces private risk-bearing at scale. In doing so, the U.S. housing finance system can move beyond emergency governance and toward a more sustainable balance between public purpose and private capital.
About the Contributor:
Brian P. Lancaster is a Senior Lecturer in the Discipline of Finance at Columbia Business School where he teaches courses in Housing, Capital Markets, Real Estate Finance and Real Estate Debt Markets. In 2023 he received the Robert W. Lear Award for teaching excellence. In 2025, he received the Singhvi Prize for Scholarship in the Classroom.