How a corner of the Trump trade could unleash higher mortgage rates

• Rising odds of Fannie Mae and Freddie Mac being re-privatized have sent shares of the firms soaring.
• But a move to release them from government control could damage the mortgage market, Pimco warned.

An under-the-radar Trump trade has soared this year on bets of a big shake-up in the mortgage industry — but it's a change that might not ultimately benefit everyday Americans.

That's according to Pimco, which said this week that the privatization of Fannie Mae and Freddie Mac, the mortgage finance giants that were taken over by the government in the wake of the 2008 housing crash, might benefit shareholders but could jack up costs for borrowers.

"If an exit from conservatorship is rushed and certain issues are not addressed — particularly as they relate to the government guarantee associated with the GSEs entering conservatorship during the global financial crisis in 2008 — many Americans could unwittingly face higher mortgage rates," analysts at the firm wrote.

Discussion of reforming the government sponsored enterprises has been reignited in Trump's second term. The president failed to release the companies from conservatorship in his first term, but investors have been encouraged that this time could be different.

Fannie Mae and Freddie Mac have soared since the November election, and are up 138% and 92% year-to-date, respectively. Ending the 16-year conservatorship could spawn an even larger outperformance, Pimco suggested.

Yet, Pimco said it sees substantial risks if alternatives to re-privatizing Fannie and Freddie aren't considered.

After all, these GSEs have evolved into an essential cog of the mortgage sector, accounting for 70% of the market. By purchasing mortgages and packaging them into bonds, the two agencies are an enormously important source of liquidity for the US housing market.

Thanks to limits and controls set up by policymakers, the GSEs have become significantly less vulnerable to shocks under government oversight. That could weaken if the agencies go private, making mortgage borrowing riskier and potentially cutting into liquidity.

"The potential widening of mortgage spreads and the resulting increase in primary mortgage rates could negatively impact both investors and consumers," JPMorgan wrote in January. "Uncertainty around government support after privatization might lead to higher and more volatile borrowing costs, worsening the current challenges in housing affordability."

And higher rates are the last thing prospective homebuyers want to deal with in today's market. While prices remain elevated, the 30-year mortgage rate is also high relative to the ultra-low rates in the years after the financial crisis.

The 30-year fixed mortgage rate was hovering around 6.81% this week.

The point Pimco is making appears to be under consideration by the administration. In February, Treasury Secretary Scott Bessent said that Fannie and Freddie's release depends on the impact on mortgage rates.

" The priority for a Fannie and Freddie release — the most important metric I am looking at is any study or hint that mortgage rates would go up," Bessent told Bloomberg.