When President Donald Trump floated the idea of releasing Fannie Mae and Freddie Mac from federal conservatorship in a social media post last week, it raised the question of what would happen to the mortgage giants if another financial crisis occurred. After all, they were placed under the regulatory umbrella of the Federal Housing Finance Agency (FHFA) in 2008, when their financial conditions significantly deteriorated amid a broader economic recession.

On Tuesday, Trump doubled down on his intention to remove Fannie and Freddie from FHFA oversight while also pledging to maintain government backing should they encounter financial difficulties.

“I am working on TAKING THESE AMAZING COMPANIES PUBLIC, but I want to be clear, the U.S. Government will keep its implicit GUARANTEES, and I will stay strong in my position on overseeing them as President,” Trump wrote on Truth Social.

Fannie and Freddie play a crucial role in the mortgage industry by purchasing mortgages from lenders and packaging them as mortgage-backed securities, which are then sold to investors. This process creates liquidity for lenders by freeing up capital for them to make subsequent loans.

The “implicit guarantee” referred to by Trump means that the federal government would bail out Fannie and Freddie if they become insolvent and are unable to meet their financial obligations.

In a brief published in January by Jim Parrott of the Urban Institute, a Washington, D.C.-based think tank, and Mark Zandi, chief economist of Moody’s Analytics, the authors note that critics of the implicit guarantee argue that it gives Fannie and Freddie shareholders the upside while taxpayers are left footing the bill.

But Parrott and Zandi point out that if the government-sponsored enterprises (GSEs) are released from conservatorship, the implicit guarantee would be necessary for the companies to maintain investment-grade credit ratings and for the Federal Reserve to be able to purchase their debt and mortgage-backed securities.

“Critical to the rating agencies and the Fed is not that the GSEs posed little risk, but that they enjoyed the unlimited backing of the U.S. government, which allowed the Fed and rating agencies to treat them as if they were part of the government,” they wrote. “This is a vital distinction, as the Trump administration will not be able to replace the government’s implicit guarantee with, say, more GSE capital or an even larger credit line and expect the same treatment from the Fed and each of the rating agencies.”

Parrott and Zandi add that if Fannie and Freddie were to see their credit ratings downgraded in the absence of an implicit guarantee, it would have a detrimental impact on the entire housing finance industry and would lead to an increase in mortgage costs for consumers.

“The cost of the GSEs’ funding would increase, likely dramatically in times of financial stress,” they maintained. “This would force [GSEs] to raise their guarantee fees and potentially reduce the amount of risk they are willing to take on, all of which would increase the cost of, and reduce access to, mortgage credit.”

The largest IPO in U.S. history

It is unclear exactly how Trump would take the companies public, as they are already publicly traded on the over-the-counter market, sometimes called the Pink Sheets. One possibility is that Trump means the companies would be listed on a major exchange via an initial public offering (IPO) after their exit from conservatorship, such as the New York Stock Exchange.

Parrott and Zandi note that such a move would be the “largest initial public offering in history.” Nor would it be an easy task, they claim, as it would involve “setting a fee for Treasury’s $250 billion line of credit that reflects its value but does not bankrupt the GSEs, all while transitioning much of the nation’s mortgage infrastructure into private hands during the worst housing affordability crisis in a generation.”

Donald H. Layton of the NYU Furman Center observed in an analysis published in April that issuing new shares of Fannie and Freddie via a public offering to raise capital and accelerate their conservatorship exits would be “highly problematic.”

Layton noted that the “stock price will likely have to be highly discounted to attract equity investors, meaning that the new stockholders would own a disproportionately large share of the company compared to the dollars they invested.”

He explained that this is because “uncertainties surrounding the revenues and profits of [Fannie and Freddie] after conservatorship versus what they have been during conservatorship are unusually high, especially given how much the government and politics impact the two GSEs.”

Should the Trump administration pursue IPOs of Fannie and Freddie, Layton argues that it will force existing shareholders “to take a giant loss as their shares get very heavily and permanently diluted.”