Should the GSEs be privatized? Jim Millstein, Jim Parrott, and Mark Zandi

Seventeen years after the financial crisis led to the government conservatorship of Fannie Mae and Freddie Mac, the debate over their future remains unresolved. Should they stay in conservatorship, maintaining government oversight, or should they be privatized? On a special Walker Webcast, I was joined by three top housing finance experts—Jim Millstein, Co-Chairman of Guggenheim Securities; Jim Parrott, non-resident fellow at the Urban Institute; and Mark Zandi, Chief Economist of Moody’s—to explore the implications of both options.

Are Fannie Mae and Freddie Mac meeting their mandate?

Fannie Mae and Freddie Mac were created to ensure liquidity in the mortgage market. All three guests agreed that they are effectively meeting that mandate today, facilitating a robust secondary mortgage market and ensuring the availability of long-term, fixed-rate mortgages.

The risks of prolonged conservatorship

Jim Millstein argued that the conservatorship has lasted far longer than intended, creating governance challenges. Without shareholders and a board of directors advocating for efficiency and innovation, the enterprises risk becoming mere instruments of shifting political agendas. He and I agreed that the limitations on executive compensation and technology investment could be barriers to long-term competitiveness.

The case for maintaining the status quo

Jim Parrott and Mark Zandi countered that the current system is working well. They emphasized that the conservatorship structure provides stability, especially during economic downturns, as demonstrated during the COVID-19 pandemic. They also warned that a rushed privatization could increase mortgage costs and destabilize the housing finance system.

Capitalization and regulatory considerations

If Fannie and Freddie were to be privatized, their capital requirements would be a significant hurdle. Current regulations require them to hold 4 percent risk-based capital—significantly higher than what stress tests suggest is necessary. Millstein argued that these capital levels should be reevaluated to align with their actual risk profile. He also suggested a regulatory framework that ensures stable returns while preventing excessive risk-taking.

The role of government guarantees

One of the biggest concerns in the privatization debate is the status of the government guarantee. Parrott and Zandi believe an explicit government guarantee is necessary to keep mortgage rates low and maintain investor confidence. Millstein and I, on the other hand, proposed maintaining an implicit guarantee with regulatory safeguards, similar to the treatment of systemically important financial institutions like JPMorgan Chase.

What’s next?

With a new administration taking shape, the question of privatization could gain renewed momentum. The last major push to privatize Fannie and Freddie came during the first Trump administration but stalled due to the COVID-19 crisis. If the process moves forward, policymakers must carefully balance stability, investor confidence, and the broader economic impact.

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