Interest rates could be set to jump
With the Trump administration floating the idea of privatizing two of the largest mortgage loan programs, mortgage brokers are speculating what that may mean for the market.
Fannie Mae and Freddie Mac, which back most of the nation’s consumer mortgage loans, may be privatized if the administration gets its way. Trump is considering an executive order that would privatize the two government-backed agencies.
William Pulte, the new director of the Federal Housing Finance Agency (FHFA), removed a dozen board members at Fannie and Freddie and named himself chairman of both boards as part of an initial overhaul of the two government-sponsored enterprises (GSEs).
With more potential changes on the horizon, mortgage brokers are pondering what it might do to the lending landscape.
Jose Tejada, vice president of mortgage lending with Rate.com, believes the first thing that would happen if Fannie and Freddie are privatized is an increase in mortgage rates.
“It’s fairly certain that the immediate effect of privatization is that it will raise mortgage rates,” Tejada said. “A backing by the government creates a nice safety net. Coming off of that, agencies will be impacted by market dynamics and will react to the same. In this environment, that means higher rates.”
This sentiment was echoed by Laurie Goodman, the founder of the Housing Finance Policy Center at the Urban Institute, in an interview with the New York Times.
“It would mean that mortgage rates would increase — definitely,” Goodman told the Times.
Could privatization lead to more flexibility in lending?
Proponents of privatizing Fannie and Freddie believe that government ownership limits competition in the mortgage market. It also makes taxpayers responsible if another housing crisis hits, as was the case in 2008, when the government spent $190 billion to stabilize them by putting them under conservatorship.
Others believe there could be more flexibility in lending without government oversight. However, mortgage brokers like Tejada aren’t convinced.
“There is a school of thought that expects that through privatizing, we could see more flexibility in guidelines and innovation in lending,” Tejada said. “But I see that as a big ‘maybe’.”
Goodman also mentioned in the New York Times article that rate locks may disappear if the interest rate market becomes too volatile. If they do exist, lenders may charge higher fees to secure them.
The Times article detailed how a privatization would work, which would involve an Initial Public Offering (IPO). Investors would buy shares of the companies, which would clear Fannie and Freddie off the government’s ledger. It would be a cash influx to the government, but it could come at a risk to the mortgage industry.
Tejada said that while there are concerns about privatization changing how these programs work for brokers, don’t expect to see immediate drastic changes.
“It is highly unlikely that things are going to change for the coming years in terms of privatization,” Tejada said. “It would create too much economic instability (for a rapid change).”
Trickle-down effect on the entire mortgage lending landscape
The gamble behind privatizing Fannie and Freddie is the sudden increase in interest rates. Especially when rates have begun to recede. In early March, the average 30-year fixed mortgage rate dropped to its lowest point in three months.
This rate drop led to a surge in mortgage refinances. However, continued strength in the refinance market will be tied to a continued decline in rates, which saw an upward bump through the rest of March.
March saw a surge in mortgage refinances as 30-year fixed rates hit a three-month low. Thuan Nguyen of The Loan Factory notes that while refinance activity remains strong, future prospects depend on rate movements.https://t.co/vXhpdowBea
— Mortgage Professional America Magazine (@MPAMagazineUS) March 31, 2025
Rates are forecast to continue a steady decline, according to Fannie Mae. The organization noted in its recent forecast that rates are expected to decline slightly through the next two years. They expect rates to end 2025 at 6.3% and 2026 at 6.2%.
However, according to Tejada, if rates jump suddenly, it will not only slow the housing market, but also the overall economy.
“The economy and markets are seeking any stability they can get, and a start on a move like this will create further disruption,” Tejada said. “If rates increase, we will be hurting the American consumer further, especially at a time when lower rates are much needed for consolidation of consumer debt, home repairs, college tuition, or other expenses.”
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