President Trump wants to take Fannie Mae and Freddie Mac public. The plan has some problems.
On Wall Street and in Washington, D.C., confusion reigns over how the Trump administration will pull off a potential public offering for mortgage giants Fannie Mae and Freddie Mac later this year.
The Trump administration has floated the idea of selling down the government stakes in the two giants, a move that would amount to the largest IPO in history under current values being weighed. The precise mechanics of such a deal have yet to be clarified.
Shop Top Mortgage Rates
Powered by Money.com – Yahoo may earn commission from the links above.
Plans being discussed within the administration, first reported by the Wall Street Journal, could involve a 5% to 15% sale of Fannie and Freddie shares at a combined $500 billion valuation or higher. But to attract investors, analysts and housing experts see some problems that need to be solved along the way.
In the meantime, President Trump is still weighing all of his options. That means plans could change. He has met in recent weeks with CEOs for some of the biggest Wall Street banks, including JPMorgan Chase’s Jamie Dimon, Bank of America’s Brian Moynihan, and Citigroup’s Jane Fraser, to discuss the mortgage giants.
Last weekend, he added more fuel to the IPO idea, sharing a doctored image of himself ringing the bell at the New York Stock Exchange on Truth Social.
Fannie and Freddie advisor: CEO of JPMorgan Chase, Jamie Dimon in New York City. (Photo by Noam Galai/Getty Images) ·Noam Galai via Getty Images
Behind Trump in the image is a banner for neither Fannie or Freddie, but instead a single entity called the “Great American Mortgage Corporation,” listed with the stock ticker MAGA.
So far, the government’s plan for kicking off a public offering for the mortgage giants has left analysts and housing experts alike a bit baffled. Some are questioning whether such a sizable and complex stock offering could get done before the end of 2025.
“To hit this timeline, the Trump administration is going to have to move very quickly through some very weedy and substantive policy discussions,” said Jeb Mason, a former Bush White House and Treasury official.
Fannie Mae and Freddie Mac, also known as the Federal National Mortgage Association (FNMA) and Federal Home Loan Corporation (FMCC), play essential roles in the US housing market by purchasing mortgages and then packaging and selling them as bonds to investors.
Both fell under government conservatorship during the 2008 financial crisis, when mortgage defaults soared. Untangling the two firms from the government’s control has been a long and hotly debated matter.
Some prominent Wall Street investors, including billionaire Bill Ackman and John Paulson, placed their bets years ago by purchasing common and preferred stock in Fannie and Freddie, expecting the conservatorship for the two companies would eventually end.
The first Trump administration aimed to do it, even hiring Morgan Stanley and JPMorgan Chase for advice. Ultimately, it could not get the job done.
Such policy discussions revolve around weighing the potential benefits of reducing the federal government’s role in the giants against the risks of disrupting the housing market.
“It’s also possible that they are going to try to have some sort of market offering without answering all the key questions,” Mason added.
For sale? the Fannie Mae headquarters in Washington. (AP Photo/Manuel Balce Ceneta, File) ·ASSOCIATED PRESS
For potential IPO investors, the most crucial questions are whether the mortgage giants can promise some degree of shareholder rights along with a relatively stable level of profit.
The administration has at least two essential problems in front of it to fulfill those assurances, according to KBW analyst Bose George.
In exchange for bailing out the mortgage giants more than a decade ago, the Treasury Department holds a substantial stake in Fannie and Freddie senior preferred shares, currently valued at over $340 billion.
The conventional thinking is that the federal agency must either dissolve or convert its shares to common stock, with both options presenting potential lawsuits from taxpayers or existing shareholders.
“It could be a very messy start for an IPO, especially with this idea that there could be huge amounts of litigation,” said George.
The other problem is that the mortgage giants face a $181 billion gap in the amount of loss-absorbing capital they are required to set aside in the event of a downturn. Meeting that minimum requirement would not only take the better part of a decade, it would also drastically drag down each of the giants’ return on equity so much that “no one will buy the stock,” said George.
But perhaps the biggest problem is if the Trump administration caters too much to investors.
There’s also “all kinds of risk to the housing system and homeownership generally, if you wind up with an administration that is too hell-bent on making Fannie and Freddie too appealing to investors,” said Jim Parrott, a former Obama administration housing adviser.
The Trump administration has also, so far, avoided laying out how it plans to ensure the mass perception that the government will backstop these firms in a crisis.
This guarantee allows Fannie and Freddie to buy mortgages, package them as bonds, and sell them to investors at a lower credit rating. It remains hotly debated whether the administration will need to take further steps to ensure this guarantee does not weaken.
If there is any degree of change of status between Fannie, Freddie, and the government where certain issues aren’t addressed, “many Americans could unwittingly face higher mortgage rates,” PIMCO’s head of public policy Libby Cantrill said in a note to clients this week.
Christopher Whalen, chairman of Whalen Global Advisors, an advisory firm focusing on mortgage finance and banking, said, “There is a vast communications task that has to occur to the housing complex, the realtors, the home builders, the lenders, the banks, everybody.”
David Hollerith is a senior reporter for Yahoo Finance covering banking, crypto, and other areas in finance.
Click here for in-depth analysis of the latest stock market news and events moving stock prices
Read the latest financial and business news from Yahoo Finance
