Although Fannie Mae and Freddie Mac, two government-backed mortgage giants with a taxpayer-funded safety net, helped crash the economy in 2008, the Biden administration in its final days quietly laid the groundwork to set them loose again. The goal? End their conservatorship, the federal leash that keeps their taxpayer-funded gambling in check.

Last month, President Donald Trump said he would soon make a decision on the proposal. Hopefully, he and Bill Pulte, his pick to run the Federal Housing Finance Agency, will do what they’ve done with most of former President Joe Biden’s bad ideas — toss them straight into the trash. Because unless the core problem — the taxpayers being on the hook for everything Fannie and Freddie do — is fixed first, removing these rules would be a huge mistake.

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Fannie Mae and Freddie Mac don’t operate in a free market. These so-called “government-sponsored enterprises” buy up mortgages from private lenders and then repackage and sell them with the understanding that Washington will cover the losses if things go bad. That means Fannie and Freddie can take bigger risks than a private firm would because taxpayers are the ones left holding the bag.

It’s a rigged system. And if you take off the leash without first eliminating that government backstop, you’re not setting them free; you’re just giving them another license to gamble.

For years, politicians from both parties pushed banks to issue more and more loans no matter the credit risk. Mortgage brokers gladly played along, knowing they could dump any dodgy mortgages on Fannie and Freddie. And the government-sponsored enterprises bought up $2 trillion in risky, subprime loans, knowing full well the federal government would bail them out.

And that’s exactly what happened. When the housing bubble burst in 2008, taxpayers got stuck with nearly $200 billion in losses. Not the banks, not the brokers, and not the executives. Just ordinary Americans.

To stop the bleeding, Fannie and Freddie were put under federal conservatorship, a form of bankruptcy. And for almost two decades, they’ve stayed there. But while Washington has made some surface-level changes over time, such as tweaks to fees, rules, and leadership, it has never addressed the real problem. That, of course, is that the government-sponsored enterprises still operate with a federal guarantee. Fannie and Freddie are still private firms with public backing, and that means they’re still a massive financial risk.

Washington pulling them out of conservatorship without fixing this fatal taxpayer subsidization flaw wouldn’t make these entities more accountable. It would do the opposite, giving them more leeway to speculate, more power to distort the housing market, and more freedom to rake in profits while taxpayers absorb all the negatives that come with their decisions.

The last time Fannie and Freddie had unfettered ability to speculate on our dime, those crony enterprises helped bring down the entire financial system. If they are allowed to do the same today, it could lead to an even worse recession than the one we experienced earlier this century. Why? Because, today, they subsidize 60% of new mortgages, versus just 45% before the 2008 recession began. That’s a ton more money to gamble away at the taxpayers’ expense. 

TRUMP MUSES MAKING FANNIE MAE AND FREDDIE MAC PUBLIC

For real reform, the Trump administration needs to start by removing the publicly funded lifeboat given to Fannie and Freddie. Either phase it out completely or draw a bright red line that says the federal government will no longer step in when they mess up. Until that happens, the idea of “privatizing” Fannie and Freddie is a dangerous illusion.

The housing market doesn’t need more risk. It needs stability, discipline, and a clear exit from the crony capitalism that created the 2008 meltdown. That means structural reform first, then a responsible path out of conservatorship. Washington has made this mistake before. It shouldn’t make it again.

Daniel J. Mitchell is the president of the Center for Freedom & Prosperity and a former senior fellow at the Cato Institute. He specializes in fiscal policy, particularly tax reform and international tax competition.