The prospects of taking Fannie Mae and Freddie Mac public

Steven Abrahams | May 30, 2025

This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors. This material does not constitute research.

The US may have a path to getting Fannie Mae and Freddie Mac out of conservatorship through a public offering, as recently advertised by President Trump, but it will have to get over significant hurdles. The biggest is the $382 billion of equity needed if the companies want to meet current regulatory capital requirements. The smaller ones are all the ways the companies touch the mortgage and rates markets. The chance of getting this done before midterm elections seems for now less than 20%. But the motivation would be an extraordinary windfall gain for taxpayers and flexibility in the federal budget.

Socializing the idea

President Trump first raised the possibility of a public offering in a May 21 social media post, saying he was giving “very serious consideration to bringing Fannie Mae and Freddie Mac public.

“I will be speaking with Treasury Secretary Scott Bessent, Secretary of Commerce Howard Lutnick, and the Director of the Federal Housing Finance Agency, William Pulte, among others, and will be making a decision in the near future,” he added. “Fannie Mae and Freddie Mac are doing very well, throwing off a lot of cash, and the time would seem to be right. Stay tuned!”

On May 27, he posted again. “Our great Mortgage Agencies, Fannie Mae and Freddie Mac, provide a vital service to our Nation by helping hardworking Americans reach the American Dream—Home Ownership,” he wrote. “I am working on TAKING THESE AMAZING COMPANIES PUBLIC, but I want to be clear, the US Government will keep its implicit GUARANTEES, and I will stay strong in my position on overseeing them as President.”

These posts leave lots of wiggle room for the administration to either pursue the idea or not. But the administration may see a treasure chest at the end of this rainbow.

A challenging equity raise

If the administration chooses to take Fannie Mae and Freddie Mac public while meetIng current FHFA capital requirements, the first and possibly biggest hurdle could involve an equity offering of $382 billion. Company SEC filings as of March 31 show Fannie Mae operating with a regulatory capital shortfall of $220 billion and Freddie Mac with a shortfall of $162 billion. These offerings would far exceed history’s largest to date, which was the December 2019 Saudi Aramco offering of $25.6 billion.

A substantial part of proceeds presumably would go toward retiring the $193 billion in face value of senior preferred stock held by the US Treasury. Over time, this position has received dividends and accrued additional value in lieu of dividends that could make the obligation to the Treasury larger, but we’ll put that detail to the side for now. The Treasury could choose to exchange the face value of the preferred for common, which would reduce the required capital raise to $189 billion. The $33 billion in perpetual noncumulative preferred stock held today by private investors would stay on the balance sheet. And current holders of common equity would get diluted by new shares issued.

The Treasury also holds warrants expiring September 7, 2028, for 79.9% of common equity struck at one one-thousandth of a cent per share. The Treasury could either exercise or sell the warrants. When the warrants get exercised, the companies would then register enough shares to satisfy the warrants.

In theory, this transaction could produce an extraordinary windfall. If Treasury converted its senior preferred stock to common and exercised its warrants, it would own 90% of each company. Note that the public offering would raise $382 billion in in equity representing a 20.1% stake in the companies. That implies a combined value of more than $1.9 trillion, making the Treasury stake worth more than $1.7 trillion. It is this potential windfall and the impact if would have on projected federal budget deficits that likely has White House attention.

Of course, one big assumption is that investors would willingly invest $382 billion for a 20.1% stake in the companies. In 2024, Fannie Mae generated comprehensive income of nearly $17 billion and Freddie Mac nearly $12 billion, for a combined $29 billion. The participants in the capital raise would own $5.83 billion of this for an earnings yield of 1.53%. The current earnings yield on the S&P 500 is 5.08%. Under these conditions, placing $382 billion of equity could be a tough sell.

Treasury could try to address the challenge of raising this much equity in a few ways:

• Reduce capital requirements. Treasury could ask FHFA to reduce capital requirements for the companies, lowering the size of the raise. Since the director of FHFA serves at the pleasure of the president, the White House could direct this. Of course, this would likely leave the ultimate stability of the companies in doubt and effect ratings, counterparties, the cost of debt, spreads on MBS and the earnings yield required to hold equity—even if the market continued to view the companies as too-big-to-fail and implicitly guaranteed by the US; after all, equity and preferred would still be at risk if one day they went back into conservatorship.
• Restructure the senior preferred stock. Instead of converting the Treasury’s senior preferred stock to equity, it could convert to perpetual, noncumulative preferred stock. This would allow the Treasury’s position to become part of Tier 1 regulatory capital at a much lower cost than common equity. The public offering would then need to raise only $189 billion, and the companies’ 2024 income would amount to a 3.04% earnings yield, at least before any dividends to new and existing perpetual preferred—closer to S&P 500 levels but still short.
• Propose a much more aggressive business model. Fannie Mae and Freddie Mac currently operate as mortgage market utilities with highly regulated guarantee fees and combined mortgage investment portfolios of less than $200 billion. Before 2008, the enterprises had much more leeway to set guarantee fees, to expand into emerging mortgage lending products, to guarantee non-agency MBS and to run mortgage investment portfolios that reached $1.6 trillion in 2003. Treasury could propose allowing the companies to take bigger roles to generate sufficient income for shareholders.

Any one or a combination of these might make a public offering more plausible.

These are just the economic challenges of a public offering, leaving political challenges that come along with any implicitly guaranteed financial institution—the companies’ gains would go largely to shareholders while any losses approaching insolvency would go to taxpayers.

A host of issues for debt markets

Privatization of Fannie Mae and Freddie Mac would then raise a number of issues for the debt markets:

• Credit rating of the debt and MBS
• Treatment of the debt and MBS under bank capital and liquidity rules
• Treatment of the MBS for Federal Reserve QE
• Response of international investors
• Impact on the TBA market
• Impact on UMBS
• Impact on loan purchase footprint
• Impact on MBS spreads
• Impact on rate volatility

Credit rating

Moody’s has noted in a February 10 report that even with the return of Fannie Mae and Freddie Mac as private companies operating under their original congressional charters, the size of their businesses and their importance to US mortgage finance would likely mean they would still have implicit backing by the US government. Moody’s on May 19 downgraded Fannie Mae and Freddie Mac from ‘AAA’ to ‘Aa1’ as an automatic consequence of downgrading the US government. In the aftermath of privatization, the agency wrote in February, “any downgrade of the long-term ratings of the senior unsecured bonds associated with a reduction in our government support assessment of such debt would likely be limited to one to three notches.” Moody’s does not rate the MBS, but many investors would likely view the MBS as carrying the same rating.

Moody’s has also noted that if privatization came with a clear requirement for orderly resolution in the event of insolvency—a current requirement for US globally systemic important banks—that could signal a weaker government appetite for backing the enterprises. In that case, a downgrade could go beyond one to three notches but still leave Fannie Mae and Freddie Mac as investment grade.

Bank capital and liquidity rules

If Fannie Mae and Freddie Mac continue to operate under their old charters as federal agencies with substantially more capital than before conservatorship and with close regulation, then bank regulations would likely continue their 20% risk weighting for the debt and MBS and their classification as Level 2A High Quality Liquid Assets. That should preserve most if not all current US bank demand for Fannie Mae and Freddie Mac obligations.

Federal Reserve QE

Section 14 of the Federal Reserve Act allows the Fed to buy “any obligation which is a direct obligation of, or fully guaranteed as to principal and interest by, any agency of the United States.” If Fannie Mae and Freddie Mac continue to operate as federal agencies, that presumably would still allow the Fed to hold their debt and MBS.

International investors

International investors have shied away from Fannie Mae and Freddie Mac MBS in favor of Ginnie Mae MBS since the Global Financial Crisis. A public offering of the companies would likely keep that trend in place or accelerate it, although the marginal impact at this point would likely be small.

Impact on the TBA market

As long as the market continues to view Fannie Mae and Freddie Mac as implicitly backed by the US government, TBA should continue to function well. If the enterprises are required to have orderly resolution plans, TBA liquidity could erode especially in any future circumstances that might call their solvency into question.

Impact on UMBS

Renewed competition between Fannie Mae and Freddie Mac for market share in securitization could introduce changes in underwriting, servicing, guarantee fees, loss mitigation or other processes that could change prepayment characteristics of their pools. That could undermine the consistency of the UMBS market unless their regulator insisted on strict uniformity in key aspects of the enterprises’ businesses.

Impact on the purchase footprint

Privatizing the enterprises would likely restore management incentives to find profitable new opportunities to extend their loan purchases and other guarantees. They could conceivably pursue investor loans, home equity lending and other parts of the mortgage market more aggressively.

Impact on MBS spreads

If the enterprises reemerge under their old charters at a size that encourages the assumption of an implicit guarantee and if they keep their special status under bank and Fed regulations, then spreads should eventually end up in their current neighborhood. Spreads could definitely widen in the short run as public debate ranges over all the elements of an invariably complex transaction. Only privatization explicitly without government backing would likely leave MBS spreads materially wider. And if the companies are allowed to restart portfolio investing, then MBS spreads could eventually end up tighter than current levels.

Impact on rate volatility

If the enterprises reemerge with management incentives to restart portfolio investing—their largest source of profitability before 2008—then Fannie Mae and Freddie Mac would likely resume delta-hedging of MBS negative convexity and purchasing of interest rate options. That would transfer the volatility of MBS cash flows to other parts of the rates markets and likely drive up rate volatility.

Prospects for getting it done

At this point, the prospects for getting equity and debt market issues resolved before mid-term elections look low, let’s say less than 20%. The administration would have to resolve substantial issues with the equity raise—namely, making the expected cash flow to equity attractive enough. The administration would also have to address the issues with debt markets well enough to avoid a politically damaging widening of mortgage spreads and avoid damage to MBS liquidity. That looks like a process that would take at least a year, heroically assuming no litigation along the way, putting it right in the middle of campaigning for mid-term elections. These issues probably do not sell well in retail politics, so the base case looks like deferral until after the mid-terms, at best.

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The view in rates

The market closed on Friday pricing fed funds at 3.77% to end the year, 10 bp below the Fed’s March dots. Through May, market expectations have lined up closely with Fed dots. The close agreement likely reflects a series of messages from Fed speakers about the risk of inflation from tariffs. The Fed looks prepared to wait until it has a better view of whether tariffs will bring a 1-time price change or more persistent inflation

Moody’s downgrade of the US from ‘AAA’ to ‘Aa1’ on May 17 has almost certainly led more investors to focus on US fiscal policy and debt. Debt-to-GDP is at 100% and expected to grow over the next decade to 117%. The budget bill moving through Congress could push it higher. That promises to add term premium to the yield curve, steepening the curve.

Other key market levels:

• Fed RRP balances leaped to $316 billion as of Friday, up $150 billion in one day. Since this comes at the end of the month of May, it likely reflects limits on bank willingness to do repo and balloon their end-of-month balance sheet, pushing demand for repo exposure to the Fed facility.
• Setting on 3-month term SOFR closed Friday at 432 bp, unchanged in the last two weeks.
• Further out the curve, the 2-year note traded Friday at 3.88%, down 12 bp in the last two weeks. The 10-year note traded at 4.40%, down 8 bp in the last two weeks.
• The Treasury yield curve traded Friday with 2s10s at 50 bp, steeper by 2 bp in the last two weeks. The 5s30s traded Friday at 97 bp, steeper by 12 bp over the same period
• Breakeven 10-year inflation traded Friday at 233 bp, down 3 bp in the last two weeks. The 10-year real rate finished the week at 206 bp, down 5 bp in the last two weeks.

The view in spreads

Moody’s downgrade of the US could push credit spreads out slightly, but that should quickly take a back seat to developments in tariffs. The de-escalation by the US and China in early May took significant risk out of the market by showing China’s willingness to talk and possibly compromise. The on-again-off-again discussion of 50% tariffs on the EU briefly revived concerns. Now the US and China are contesting non-tariff barriers. Tariff risk looks like a persistent new part of the risk landscape. The Bloomberg US investment grade corporate bond index OAS traded on Friday at 89 bp, tighter by 1 bp in the last two weeks. Nominal par 30-year MBS spreads to the blend of 5- and 10-year Treasury yields traded Friday at 155 bp, wider by 6 bp in the last two weeks. Par 30-year MBS TOAS closed Friday at 36 bp, wider by 2 bp in the last two weeks.

The view in credit

Tariffs should weaken most credits assuming slower growth, and hit specific credits hard based on exposure to cross-border trade flows. Excess returns from the first week of tariff war point to the specific sectors more or less exposed to tariff. We have been watching cracks in credit quality at the weaker end of the credit distribution for months. Fundamentals for the average of the distribution continue to look stable. Most investment grade corporate and most consumer balance sheets have fixed-rate funding so falling rates have limited immediate effect. Consumer debt service coverage is roughly at 2019 levels. However, serious delinquencies in FHA mortgages and in credit cards held by consumers with the lowest credit scores have been accelerating. Consumers in the lowest tier of income look vulnerable. The balance sheets of smaller companies show signs of rising leverage and lower operating margins. Leveraged loans also are showing signs of stress, with the combination of payment defaults and liability management exercises, or LMEs, often pursued instead of bankruptcy, back to 2020 post-Covid peaks. If the Fed only eases slowly this year, fewer leveraged companies will be able to outrun interest rates, and signs of stress should increase. LMEs are very opaque transactions, so a material increase could make important parts of the leveraged loan market hard to evaluate.