The ABCs of the GSEs: How changes to Fannie and Freddie could impact mortgage rates and homebuyers

Key takeaways

• Fannie Mae and Freddie Mac are integral to homeownership, which is increasingly out of reach for many Americans.
• The mortgage giants could undergo major reforms, 17 years after their government bailout.
• The potential reforms need to be considered carefully for their impacts on mortgage rates and homebuyers, among a range of other cost-benefit considerations.
• This Policy Brief examines 3 policy options and proposes a framework for understanding how select policy proposals could impact mortgage rates and homebuyers.

With record high home prices[1] and mortgage interest rates rising to levels not seen since the financial crisis,[2] homeownership has become increasingly out of reach for many American families. Amid what many experts view as a housing affordability crisis,[3] the administration is reportedly considering reforms to the entities underlying much of the housing market, Fannie Mae and Freddie Mac (formally known as government-sponsored enterprises, or GSEs).

In this Policy Brief, we explain how three leading reforms to these large institutions, which have a combined $6.5 trillion footprint,[4] could have a significant impact on the mortgage rates that U.S. homebuyers face. We estimate that, depending on the proposal, mortgage rates could rise by 0.2 to 0.8 percentage points, corresponding to an increase in payments of $500 to $2,000 per year for the typical homebuyer. Some of these reforms could also be undertaken with the explicit goal of minimizing the mortgage rate impact; and, with effective execution, the ultimate impact could be a smaller increase or even a modest decrease over an extended time horizon. That said, the main policy options under consideration present varying degrees of risk that mortgage rates will move higher. 

The ABCs of the GSEs

At their core, Fannie Mae and Freddie Mac are insurance companies that help make standardized mortgage products available to more people, at lower rates. Their primary customers are mortgage lenders — banks, like JPMorgan Chase, and non-banks, like Rocket Mortgage. Fannie and Freddie serve as backstops for mortgage borrowers, promising to make payments if homeowners default, just as a parent might “co-sign” for a child’s student loans. This guarantee reduces risk for the mortgage lenders, who can then charge a lower mortgage rate to the borrower. In exchange for the added protection, lenders pay a small fee to Fannie and Freddie, called a “guarantee fee” (or “g-fee”) — and the lenders typically pass this small cost on to the borrowers. Lenders will often bundle these newly guaranteed loans and sell them to investors as mortgage-backed securities (MBS). It is widely agreed that this business model has lowered mortgage rates because it enables a liquid and deep MBS market that further cuts lender risk. It has also helped to standardize and streamline the lending market, expanding mortgage access and homeownership to more households.

However, Fannie and Freddie ran into serious financial trouble after investing heavily in high-risk mortgages during the housing boom of the early 2000s. When the bust came and borrower defaults soared, Fannie and Freddie veered toward insolvency — threatening the U.S. financial system. In September 2008, as part of a government rescue, the GSEs were placed into an arrangement known as conservatorship, as the government took control of their daily operations and provided funding and the promise of ongoing support if needed via Preferred Stock Purchase Agreements (PSPAs). Although this was intended to be a temporary measure, Fannie and Freddie remain in conservatorship today as debates continue about how best to allow the mortgage giants to operate independently again but without posing a systemic risk to the U.S. economy.

Policy options: Same ingredients, different results

While a wide variety of plans for GSE reform have been proposed in the 17 years since the establishment of the conservatorships, these complex plans often boil down to different combinations of the same ingredients, or dimensions of reform. One dimension involves the need to raise capital in order to reduce the leverage of the GSEs — so that private capital, and not a government backstop, is on the hook in the event of substantial losses like in 2008. Another ingredient involves how to deal with the conservatorship arrangement, where an exit from conservatorship would mean that the Federal Housing Finance Agency (FHFA) would relinquish control of the GSEs back to their shareholders — where they would again be governed by a board of directors representing shareholders. The FHFA would then become a more standard regulator, much like banks have boards and are regulated (but not governed) by the Federal Deposit Insurance Corporation.

Perhaps the most significant aspect of reform is the status of the “implicit guarantee,” which has led investors to believe that the government would support the GSEs in a time of crisis, as it did in 2008 — even beyond the explicit support provided by the PSPAs. Some reform advocates call for Congress to formalize this as an “explicit guarantee” and charge the GSEs a reasonable fee in return. Others seek to continue some form of an “implicit guarantee,” and still others shy away entirely from putting taxpayer funds at risk, believing that private capital should be fully on the hook instead.

Mortgage rate impacts: G-fees and MBS spreads

GSE reform has the potential to affect homebuyers by raising or lowering the mortgage rates that lenders charge.

First, mortgage rates could be impacted by rising guarantee fees, or g-fees. The GSEs collect these fees from mortgage lenders to cover future borrower defaults. G-fees are set by Fannie and Freddie, which in conservatorship receive direct guidance from FHFA on the topic. In contexts where private capital would play a larger role — either outside or inside conservatorship — it is likely that g-fees would need to be set at an amount that reflects economic fundamentals in order to meet a targeted return on equity in light of capital requirements. In that scenario, and all else equal, higher return-on-equity targets and higher capital requirements necessitate higher g-fees. Because lenders largely pass these fees on to borrowers when setting mortgage interest rates, any modifications to g-fees are likely to be felt by homebuyers in the form of higher mortgage interest rates.

A second channel through which policy changes could affect mortgage rates would be by altering MBS spreads (the risk premia that MBS investors require above risk-free Treasury rates). For example, if a change to the status of the guarantee or to MBS investors’ perceptions of default risk leads to wider spreads (greater risk premia), this would in turn increase mortgage rates.

The table below illustrates our analysis of the effects of a change in g-fees (or a corresponding increase in mortgage spreads) on the annual payments of a household buying a new home, depending on the purchase price. The changes in payments based on the July median home price (approximately $404,000 per the U.S. Census Bureau) are shown in bold. Our calculations assume a 30-year, fixed-rate mortgage with a base interest rate of 6.5 percent, an LTV (loan-to-value) ratio of 80 percent, a direct pass-through of g-fees to mortgage rates, and payments following the formula specified by Rocket Mortgage.

3 policy proposals evaluated

To illustrate how GSE reform could impact mortgage rates through either g-fees or MBS spreads, we examine the potential effects of several illustrative reforms. Our goal is to illustrate some of the tradeoffs that the administration will face when considering substantial policy changes and what form those changes should take.

Scenario 1: Fannie and/or Freddie sell common shares but remain in conservatorship with an implicit government guarantee.

Under this option, the only material change from the status quo is that the GSEs sell common stock — either through an offering of new shares or, more likely, by converting some of the government’s senior preferred position into common shares that are then sold.

Such a proposal could have a significant impact on g-fees. How much of an effect would depend on the return on equity that investors demand in order to purchase shares and on whether the FHFA maintains the current capital requirements. For example, an Urban Institute analysis has shown that, if the current capital requirements stay in place and investors seek a return of 13 percent (for comparison to the cost of capital for banks), the GSEs would have to charge an average g-fee of 89 basis points (0.89 percent) per year on every dollar of mortgage balance that they guarantee.[5] Fannie Mae reported an average g-fee of 67 basis points in the most recent quarter,[6] so this change would mean raising g-fees by 22 basis points. That increase in fees would translate directly into higher mortgage rates — for a typical homebuyer, the cost of mortgage payments would jump by more than $500 per year (see Table 1 above).

That said, this proposal would be unlikely to result in material disruption to the MBS market. This means that we would not expect large changes to MBS spreads, so there would likely be no additional impacts on mortgage rates.

There are two important caveats if the GSEs are allowed to sell common stock while remaining in conservatorship with an implicit guarantee. First, as former Freddie Mac CEO Don Layton has pointed out, this scenario is difficult to square with elementary financial principles: It requires investors to buy shares on the condition that they have no governance rights and have little ability to forecast future earnings because of uncertainty surrounding both the ultimate resolution of conservatorship and the g-fee levels that lenders would pay. Second, one could imagine the FHFA reducing capital requirements or investors potentially accepting a lower rate of return, especially if a stock sale is more limited or targeted at a subset of investors motivated by non-economic factors. In either of these scenarios, the impact on g-fees could be smaller.

Scenario 2: Fannie and Freddie sell common shares, paired with a conservatorship release and continued implicit government support.

A second policy package also includes raising capital via common stock, maintaining government support through the PSPAs, and permitting the market to assume an implicit guarantee of government intervention should Fannie and Freddie once again face insolvency. The main difference from the first scenario is that the GSEs would be released from conservatorship.

As in scenario 1, the need to issue shares would affect g-fees to some degree. Unlike scenario 1, the need for taxpayer fairness suggests that Fannie and Freddie would need to pay a regular commitment fee to the Treasury in exchange for receiving continued government support as public companies. The commitment fee would likely be passed on to borrowers in the form of higher g-fees, assuming no other adjustments to capital or returns. The magnitude of this change would depend on the size of the commitment fee (the appropriate price that the government should charge is not clear[7])  and, as in scenario 1, the return on equity target and capital requirements.

With respect to MBS spreads, the key is whether the ratings agencies, the Federal Reserve, and investors would continue to assume that the implicit guarantee beyond the PSPA commitment would be the same as if Fannie and Freddie were still in conservatorship. Lingering questions related to these topics could cause MBS spreads to widen modestly, particularly during downturns or moments of financial stress, further increasing mortgage rates.

All in all, the changes to conservatorship and the commitment fee in this scenario would increase uncertainty about the effect on mortgage rates. An additional 10-basis-point change (over $250 per year for the typical borrower), on top of the 22-basis-point change from scenario 1, could easily be possible — along with further spread widening.

Scenario 3: Fannie and Freddie sell common shares, paired with a conservatorship release and the loss of the implicit guarantee.

This scenario differs from scenario 2 in that the administration fails to convince the market, the ratings agencies and the Federal Reserve that the federal government would backstop Fannie and Freddie beyond the PSPA commitment when they are no longer in conservatorship.

In other words, g-fees would still be impacted by the need to compensate investors for participating in the capital raise and for paying a commitment fee. MBS spreads would likely widen much more significantly. As Jim Parrott and Mark Zandi have warned: “[A]ll the primary and secondary markets that depend on the GSEs’ role as a risk-free intermediary would struggle to one degree or another, particularly in times of stress, when some investors and lenders will simply pull out of the market to avoid the uncertainty. The increased volatility would lead to a less liquid, less stable, and much more cyclical housing finance system.”

Because the implicit guarantee is so central to the mortgage market, investors may not believe that the threat to withhold support from the GSEs in a crisis is credible, especially since they are seen as “too big to fail.” But the direction of the effects is clear: In addition to higher mortgage rates from higher g-fees, this scenario would lead to wider, and potentially substantially wider, MBS spreads and higher mortgage rates for homebuyers.

In Figure 2 below, we compare the potential changes in mortgage rates across the three scenarios. Although the actual change will depend crucially on the details of any policy package — and it’s possible that well-designed reforms would mitigate mortgage rate impacts to some degree — it is worth noting that the further that any plan deviates from the status quo, the larger the potential for disruption to the mortgage markets. The stakes would be even higher if the markets were already stressed.[8]

More options: Merging, combining, holding

The scenarios above focused on several key dimensions of policy change: the need to raise capital, the status of conservatorship, and the nature of the government guarantee. Beyond these, there are other reforms reportedly under consideration that could be layered on top the scenarios discussed above. We highlight two examples:

• Merging or combining some functions of the GSEs: Recent reporting suggests the administration may be considering a merger of the GSEs. It’s likely that the only way to achieve this without an act of Congress would be to place either Freddie or Fannie into receivership, thereby enabling one to purchase most of the assets of the other. Having a single GSE would benefit the market by making it easier to maintain the standardization of practices that has occurred during conservatorship. For example, the alignment of securitization standards has enabled the transition to uniform mortgage-backed securities (UMBS), which help reduce risk, among other benefits. On the other hand, a merger would create a powerful monopoly that could lead to higher g-fees — and it could be even more challenging in the multifamily context where the two entities have different business models. In the immediate aftermath of a receivership, it is also possible that mortgage spreads could widen due to perceived instability in the MBS market during receivership.

• Holding more MBS on GSE balance sheets: Commentators have also raised the possibility that Fannie and Freddie could once again purchase more of their own MBS as investments, as they did before the financial crisis. Currently, the PSPAs impose limits on the size of these portfolios. Loosening these restrictions could help tighten mortgage spreads and lower rates by increasing the demand for MBS, assuming a fixed supply. It could also alleviate some of the need to raise g-fees to meet return targets in the context of an equity offering, given the profitable nature of this activity. At the same time, because Fannie and Freddie would need to take on additional leverage to buy more MBS, a proposal to loosen these restrictions would create additional risk for them and potentially for taxpayers. This would bring the GSEs closer to their pre-crisis forms.

GSE reform: A complicated but crucial task

With a wide range of potential avenues for reform, policymakers face a complex set of choices as they chart a course for the GSEs. Many policy goals could be at stake and evaluated closely: housing affordability, systemic risk mitigation, and taxpayer protection, among others. The material impact that reforms have on mortgage rates is not the only issue that policymakers should consider, but it should be a major consideration with billions of dollars of household income at stake. The particulars of any reforms should be evaluated closely as they are revealed in coming months.

Footnote

[1] Melissa Dittmann Tracey, “Home Prices Hold at Record Highs, Latest Quarterly Data Shows,” National Association of Realtors, August 2025.

[2] Mortgage Market Survey Archive, Freddie Mac.

[3] See, for example, reports by the Brookings Institution, the Joint Center for Housing Studies of Harvard University, and the International Monetary Fund, among others.

[4] “Global Markets Analysis Report,” Ginnie Mae, June 2025.

[5] Golding, Edward, Goodman, Laurie, Parrott, Jim, and Bob Ryan,“How to Think about Fannie Mae and Freddie Mac’s Pricing,” Urban Institute, August 2023.

[6] Form 10-Q, Fannie Mae, July 2025.

[7] Gete, Pedro, Athena Tsouderou, and Susan M. Wachter, “Pricing Mortgage Stress: Evidence and Policies,” Working Paper, 2023; “What Credit Risk Transfer Tells us about Guarantee Fees: A Single-Family White Paper,” Freddie Mac; Golding, Edward, and Deborah Lucas, “Credit Risk Transfer and the Pricing of Mortgage Default Risk,” Working Paper, October 2022; and “Seven Things to Know About CBO’s Budgetary Treatment of Potential Changes to Fannie Mae and Freddie Mac,” Congressional Budget Office, July 2025.

[8] In this figure, we have assumed a 22bp change in mortgage rates attributable to g-fees being set to achieve a bank-like ROE target (as noted in the discussion of scenario 1), a 10bp commitment fee (as in the discussion of scenario 2), and 50bp of spread widening in the case of material disruption to the implicit guarantee (a scenario for which there is little precedent but for which we assume spread widening could be as large as the current difference in spreads between agency MBS and investment grade corporate bonds). As noted in the text, we emphasize that the magnitude of these changes is highly uncertain, but the more significant the policy change, the greater the potential disruption.