There has recently been speculation regarding an initial public offering (IPO) to at least partially reprivatize Fannie Mae (Federal National Mortgage Association) and Freddie Mac (Federal Home Loan Mortgage Corporation), two huge public entities which buy mortgages from lenders to increase their liquidity, enable more mortgages, and facilitate homeownership in the US.

Fannie Mae was created by Congress in 1938 (as part of the National Housing Act), with Freddie Mac being chartered in 1970. After buying mortgages from banks and other entities, they either hold the loans or bundle them into mortgage-backed securities to be sold to private investors. Over time, each entity was reorganized to include shareholders. Nonetheless, because there was at least implicit government backing, Fannie and Freddie enjoyed some competitive advantage over other institutions.

In 2008, amidst the housing and financial crisis that precipitated the Great Recession, both firms incurred huge losses and were placed into conservatorship under the Federal Housing Finance Agency, with the Treasury extending substantial support. Since that time, they have returned to profitability, with billions in net income each year.

Together Freddie and Fannie guarantee or own trillions in mortgage debt and account for most new originations. Clearly, their health and structure are critical to the housing market and the economy. There are, however, sound reasons to consider reprivatizing them at least to some extent, an idea which is gaining traction in financial circles.

One rationale for private ownership is to reduce taxpayer risk and shift it to shareholders. In addition, privatization would level the playing field with other firms, potentially enhancing competition. It might also promote greater discipline due to market scrutiny, enhance capital allocation, better control costs, and support product innovation. Even a relatively small ownership percentage made available in an offering could also generate tens of billions for the Treasury.

It should be noted, however, that executing such an IPO is complex and faces political, regulatory, and market obstacles. One significant concern is that mortgage rates could rise modestly without Freddie and Fannie's implicit government guarantee, thus frustrating homeownership efforts in a market already dealing with elevated borrowing costs and spiraling insurance premiums. Moreover, the entities would need additional capital to comply with private-sector standards, thus potentially limiting the amount of capital available for housing purchases.

Not surprisingly, the six largest US banks and many smaller ones are jockeying for roles in the potential underwriting process, and other activities are underway. Nevertheless, it is a very complicated endeavor dependent on the right combination of political will, regulatory reform, and market conditions. If done properly, reprivatization could bring market discipline, reduced taxpayer risk, and enhanced value. If poorly executed, however, it could destabilize mortgage finance and increase borrowing costs. Stay safe!