Global Market Strategist
We recently wrote about the administration’s directive for Fannie Mae and Freddie Mac to purchase $200bn in agency-MBS to try and address housing affordability via lower mortgage rates. Within, we highlight the uncertainty given the administration’s intent to bring these institutions public. What this means for the mortgage market, taxpayers and investors depends heavily on how it gets done.
How they got here
The 2008 housing crisis forced both companies into federal conservatorship. The government injected $190 billion onto their balance sheets, extended $100bn credit lines to each, took senior preferred shares and assumed control. What is less appreciated is how profitable the arrangement became for taxpayers: Fannie and Freddie paid back a combined $301 billion to Treasury through dividend payments on their preferred shares and profit sharing heavily skewed in favor of the Treasury — well more than they ever drew. In addition, as of December 2024, Treasury’s remaining stake (on top of the $301bn that has already been paid to the Treasury since '08) stands at roughly $340 billion, with that number potentially growing to $400bn by the end of 2026.
How will an IPO affect their stock price?
As shown, when conservatorship began, common stock collapsed to near zero and never meaningfully recovered. The implicit government guarantee primarily protected MBS holders, not equity investors as common shareholders sit at the bottom of the capital structure, behind Treasury’s senior preferred claim.
In addition, in exchange for its support, Treasury holds warrants to purchase approximately 79.9% of the common equity of each company at effectively zero cost. If Treasury exercises those warrants at or around an IPO — which is widely expected — it would issue billions of dollars’ worth of new shares into the market severely diluting existing common shareholders. Given this, it seems unlikely going public would provide any upside to the share price.
How might their IPO impact mortgage rates and the bond market?
The biggest immediate risk is mortgage rates. Estimates vary wildly, but removing the government backstop could push rates up 60 to 90 basis points — painful for borrowers already sitting with rates in the mid-6% range. However, Treasury Secretary Bessent has said publicly that any privatization plan will be judged first on whether it raises mortgage rates. The most likely path preserves some form of government backstop giving private capital the confidence to step in without blowing up the 30-year fixed-rate mortgage market in the process.
The bond market impact is highly uncertain, though the reaction is likely to be felt most immediately in the agency MBS market. Fannie and Freddie guarantee nearly 75% of all conventional agency MBS in the U.S., and without some form of retained government backstop, spreads on those mortgages could widen. Beyond the guarantee itself, privatization could shift what loan types they’re willing to back. Given that private companies focus on profitability rather than market stability, shareholder pressure may push them away from lower-margin affordable loans, putting pressure on that part of the market. Affordable housing mandates are partly statutory, so how aggressively Congress reforms the charter will ultimately determine how dramatically guarantee behavior changes.
Who ultimately benefits?
Overall, there are still more questions than answers. On balance, taking these entities public appears to be a sweet deal the Treasury can cash in on, but may prove less rewarding for both equity and MBS investors.