Ending conservatorship may increase mortgage rates significantly

Treasury Secretary Scott Bessent recently discussed the future of Fannie Mae and Freddie Mac, two key players in the mortgage market. He indicated that the government could release them from conservatorship if it does not raise mortgage rates. Our current focus is on tax policy, and after that, they will consider this release, depending on any hints that mortgage rates might go up. Fannie Mae and Freddie Mac were put under government control in 2008 due to significant losses during the housing crisis. They have since returned to profitability but remain under strict oversight. With upcoming political changes, conversations are stirring about their possible release from this conservatorship. Mark Zandi, a chief economist at Moody’s, outlined several scenarios for what could happen if the conservatorship ends. Each scenario has a different impact on mortgage rates. He estimates the following probabilities: 1. **Status Quo (65% chance)**: The most likely outcome is that Fannie Mae and Freddie Mac stay under government control. This has led to stability in mortgage rates. 2. **Implicit Guarantee (20% chance)**: If released but with a government backing that isn’t formal, rates might increase by 20-40 basis points. Investors may be cautious, leading them to expect higher rates. 3. **No Guarantee (10% chance)**: Should Fannie and Freddie be fully released without any government support, mortgage rates could rise significantly, by about 60-90 basis points. 4. **Explicit Guarantee (5% chance)**: A formal government backing could slightly reduce rates by 25 basis points. However, passing the necessary legislation is very challenging. 5. **Fully Chartered Corporations (0% chance)**: This scenario would offer the lowest rates but also requires legislation that seems unlikely under the current administration. Overall, the Trump administration is cautious about any changes to Fannie Mae and Freddie Mac, especially concerning mortgage rates. If changes happen, they may occur later in their term once concerns are adequately addressed.