There are very few institutions so deeply embedded in the fabric of modern finance that most Americans never think of them, and yet every paycheck, every mortgage statement, every sale of a suburban home bears their invisible mark.
Fannie Mae and Freddie Mac are two such creatures: quasi-mythical entities whose names sound like characters from a Depression-era novel but whose balance sheets are measured in trillions. They are not banks in the traditional sense. They do not take deposits or issue credit cards. Instead, they sit astride the single largest consumer asset class in the world: the American mortgage.
To understand their power is to understand the very foundation of the U.S. housing market. These two government-sponsored enterprises (GSEs) do not merely participate in mortgage finance, they are mortgage finance. They purchase mortgages from banks and lenders, bundle those loans into securities, and guarantee them for investors. That simple but powerful model turns illiquid 30-year home loans into standardized financial products that pension funds, insurers, and foreign central banks can buy and trade like Treasury bonds. The result is liquidity: steady, deep, and seemingly inexhaustible.
In raw numbers, Fannie and Freddie currently support roughly $9 trillion of mortgage-backed securities. Together, they hold or guarantee over 72% of the conventional mortgage market, dwarfing every private competitor. Their influence is so pervasive that when they sneeze, the entire American housing sector catches a cold. If you have a mortgage, there is a high probability that one of these two companies owns it or guarantees it.
They are, in every sense, critical infrastructure. Their digital pipes run beneath every suburban cul-de-sac, every high-rise condo development, every tract of farmland financed through the mortgage system. Without them, homeownership in America would collapse under its own weight, and mortgage rates would skyrocket. Yet for all their systemic importance, these two titans are not free. For over sixteen years, they have been wards of the state, bound by a legal structure known as federal conservatorship.
The origins of this captivity lie in the 2008 financial crisis. When the global credit system began to buckle, Fannie and Freddie were thrust into the eye of the storm. Their guarantees, once considered bulletproof, were suddenly suspect. Investors feared a catastrophic chain reaction if either company failed, as nearly every bank and investment fund in the world held their securities.
Faced with a potential collapse of the housing market, the U.S. Treasury and the Federal Housing Finance Agency (FHFA) stepped in. In September 2008, they placed both companies into conservatorship, a form of emergency federal control. Under this arrangement, Fannie and Freddie continued to operate, but their profits were swept to Treasury to repay the taxpayer bailout. In essence, they were nationalized without being fully nationalized. They remained publicly traded in name, but in practice they became captive utilities, operating at the pleasure of Washington.
For investors, this was purgatory. Shares of Fannie and Freddie collapsed to near-zero, leaving common shareholders with little more than legal claims and hope. For the government, it was a solution born of necessity. By forcing both entities to send 100% of their profits, a mechanism called the Net Worth Sweep, to Treasury, policymakers could stabilize the housing market and fund the bailout without further risk to taxpayers. The sweep worked, but it left the GSEs hollow. They earned billions each quarter but were forbidden to retain earnings or build capital buffers. For sixteen years, they have operated like indentured servants, generating cash for the state but unable to grow, reinvest, or pay dividends.
This was always meant to be temporary. Conservatorship, by law, is not permanent. It is designed to rehabilitate a troubled institution, then return it to independence once it is stable. Yet for over a decade, no administration, Republican or Democrat, has been willing to take the politically fraught step of releasing Fannie and Freddie. Their balance sheets have grown. Their profits have soared. Their dominance has solidified. And still, they remain under lock and key.
The simplest way to explain their value is this: Fannie and Freddie are tollbooths on the highway of American homeownership. Every mortgage that passes through the conventional system pays a fee, a tiny fraction of a percentage point known as a guaranty fee. Multiply that small fee by trillions of dollars of volume, and the result is staggering. These are not speculative profits; they are annuity-like streams of revenue generated by an essential service.
Consider the scale: with roughly $9 trillion of outstanding mortgage-backed securities under guarantee, even a modest fee generates billions in predictable cash flow. Unlike banks, which live and die by credit cycles, Fannie and Freddie operate with government backing and strict oversight. Their function is to standardize and stabilize, not to take wild risks. This makes their earnings highly stable - so stable, in fact, that activist investors like Bill Ackman see them as better than a utility.
Think of them like Visa or Mastercard, which take a small cut of every credit card transaction. Or like the New York Stock Exchange, which charges a fee every time a share is traded. These businesses command premium valuations because their revenue is constant and their market position unassailable. Fannie and Freddie are similar, but bigger. Much bigger.
For investors, this combination of scale, stability, and systemic necessity is irresistible. In a world starved for yield, a fully privatized Fannie or Freddie would be a dream asset: a publicly traded, dividend-paying machine tied directly to the heartbeat of the American economy. The only problem is that, for now, all that cash flow flows to Treasury instead of shareholders.