Trump’s GSE stock offering plan challenged by analysts

Analysts are tempering expectations after reports that the Trump administration aims to sell shares of Fannie Mae and Freddie Mac by the end of 2025 at a combined valuation of $500 billion — more than double some market estimates.

They’re concerned about the feasibility of completing all necessary steps by year’s end. Meanwhile, the federal government’s control post-offering remains uncertain, with potential long-term influence persisting despite a reduced stake.

“I feel like getting it all done before the end of the year seems very difficult. They need to figure out capital levels,” said Bose George, an analyst at Keefe, Bruyette & Woods (KBW). “Once the process gets started, it will be clear that it’s not doable in four months. If there’s a real sense of urgency, it can be done some point next summer.” 

Wells Fargo analysts Mario Ichaso and Jonathan Carroll also see challenges in a planned offering by the government-sponsored enterprises (GSEs).

The administration’s move signals “a sense of urgency” in the privatization efforts, they wrote in a report on Friday. “We now place the odds of release at 40% as fundamental challenges remain and execution risk is elevated,” they added. 

According to The Wall Street Journal, which spoke to sources familiar with the situation, the Trump administration believes it could raise roughly $30 billion from the stock offering. Government officials plan to sell off between 5% and 15% of the GSEs’ stock, which analysts said would be a good start.  

For the government, doing it in a rushed way risks diminishing appetite for the stocks. Conversely, taking more time to elaborate on issues like the capital level and the government’s future role in the mortgage market would give investors time to digest the changes, analysts said.

The GSEs’ current capital level is 4.25%. Some investors, including Bill Ackman — who owns 210 million shares across the two companies, 10% of them preferred shares — propose a figure of 2.5%. This is still significantly higher than the pre-financial crisis level of 0.45%, and it would be six times higher than what was required to cover cumulative losses from 2007 to 2011.

$500 billion or even more?

KBW’s George said the valuation seems “very high,” with his calculations at half what’s being proposed by the government.

According to George’s estimates, Fannie Mae and Freddie Mac have about $160 billion of capital, with the potential to reach $175 billion by the end of this year. His collective valuation of the GSEs is between $200 billion and $250 billion. A $500 billion valuation suggests that these companies would trade at 15 times their earnings — a very high multiple. 

“Companies that trade like that either have to have higher returns on equity or the market needs to see them as utilities whose returns really won’t vary,” George said. “The return of Fannie and Freddie — even though we like them, these are great businesses that can be structured to be fairly steady — there’s going to be some earnings volatility.”

As an example, due to home-price declines, the GSEs had to increase their provisions for credit losses in the second quarter.

The GSEs have traded at a discount due to the expectation that their valuations could be diluted in a stock offering. The market is not sure whether the offering will happen and, if it does, whether investors will be hurt. But both enterprises saw their stock prices soar by 20% on Friday in the wake of the reported IPO.

Risks lie ahead

Accurate valuation also depends on the status of the enterprises in the future. Under conservatorship, they are subject to political winds, analysts said.

“The market cannot function without the implied guarantee, and any release effort must preserve this backstop,” Wells Fargo’s analysts wrote. “Without it, forced selling by domestic and foreign holders could destabilize both the mortgage-backed securities (MBS) and broader housing market.”

Recent posts by President Donald Trump on Truth Social raised the possibility of releasing the GSEs. 

On May 21, Trump said he was giving “serious consideration” to doing so. And on May 27, he said the federal government would continue to provide an implicit guarantee. Bill Pulte, the director of the Federal Housing Finance Agency, has stated publicly that any decision to end the conservatorships would be up to the president. 

Another challenge is whether the Department of the Treasury’s senior preferred stakes in the GSEs will be written down. Fannie and Freddie have paid $310 billion in dividends but drew only $193 billion from the Treasury after being placed in conservatorship in 2008.

The Wells Fargo analysts also pointed out that if the GSEs are limited to their guaranteed books without the ability to grow their retained portfolios, guarantee fees may need to rise again, further contributing to housing unaffordability and diminishing the enterprises’ footprint.

Lenders also see G-fees as a relevant topic in the discussion. The Community Home Lenders of America (CHLA) said it has “long advocated for the companies to be appropriately capitalized and ultimately released from these too-long conservatorships.”

“We look forward to working with the Administration to ensure this process continues to protect community IMBs by solidifying the level guarantee-fee pricing among all lenders, and ensuring the integral GSE ‘Cash Window’ execution remains efficient and without artificial constraints,” the CHLA said in a statement.