Fannie Mae and Freddie Mac: Navigating Conservatorship Exit and Shareholder Opportunities

The future of Fannie Mae and Freddie Mac remains one of the most consequential yet opaque stories in U.S. housing finance. For over a decade, these government-sponsored enterprises (GSEs) have operated under the conservatorship of the Federal Housing Finance Agency (FHFA), a status imposed after their near-collapse in 2008. As of 2025, the Trump administration has reignited debates about their potential privatization, but the path forward is fraught with political, economic, and market risks. For investors, the question is whether to bet on a partial exit from government control—or brace for prolonged uncertainty.

The Administration's Ambiguous Agenda

President Donald Trump has repeatedly vowed to “take Fannie and Freddie public,” a phrase that has generated both optimism and skepticism. Treasury Secretary Scott Bessent and FHFA Director William Pulte have clarified that the administration's focus is on a partial transition—potentially selling government-held shares or restructuring ownership—rather than a full privatization. However, the lack of a concrete timeline or legislative framework leaves investors in a fog. The administration's mantra is clear: any changes must not destabilize mortgage rates, which remain a critical barometer for both the housing market and the GSEs' profitability.

Risks: Mortgage Rates and Market Volatility

The most immediate risk lies in mortgage rate sensitivity. If Fannie and Freddie are released from conservatorship without a government backstop, investors could demand higher yields on their mortgage-backed securities to compensate for perceived risk. Moody's chief economist Mark Zandi estimates this could push 30-year fixed mortgage rates up by 60–90 basis points—potentially to 7.42% from 6.82% today. Such a jump would curb homebuying activity, reduce refinancing demand, and erode the GSEs' revenue from guarantee fees. For shareholders, this could translate to declining earnings and a re-rating of the GSEs' valuations.

Moreover, the legislative hurdles are formidable. An explicit government guarantee—a likely prerequisite for stable mortgage rates—would require congressional approval. With a crowded agenda and partisan divisions, this seems unlikely in 2025. Even a partial privatization could face legal challenges or regulatory delays, prolonging the uncertainty.

Rewards: Privatization Potential and Capital Gains

Conversely, a successful partial privatization could unlock value for shareholders. If the government sells a portion of its stake in Fannie and Freddie, the shares could see a liquidity boost, driving up prices. The GSEs' robust financials—Fannie reported a $3.7 billion net income in Q1 2025, while Freddie posted $2.8 billion—suggest they are well-positioned to operate independently, provided they retain some form of government support.

A key upside is the possibility of an implicit guarantee remaining intact. If investors believe the government will still underwrite the GSEs' risks, mortgage rates could stay low, preserving the GSEs' role in the housing market. This scenario would allow Fannie and Freddie to continue generating steady profits through their core business of purchasing mortgages and securitizing them, while their shares benefit from a more market-driven valuation.

Strategic Investment Considerations

For investors, the key is to balance optimism with caution. Here's how to approach the GSEs:

1. Monitor Mortgage Rate Trends: The GSEs' share prices are inextricably linked to mortgage spreads. A widening of spreads (due to higher rates) could pressure their earnings. Investors should track FHFA's guidance on capital requirements and any signals about the government's willingness to maintain an implicit guarantee.

2. Assess Liquidity Needs: Fannie and Freddie still need to build capital buffers to meet FHFA's thresholds. If they fail to meet these targets, the government may retain tighter control, delaying privatization. Conversely, strong capital growth could accelerate a partial exit.

3. Hedge Against Rate Risks: Given the potential for rate volatility, investors might consider hedging their GSE positions with short-term Treasury bonds or mortgage rate futures. This could mitigate losses if rates spike.

4. Evaluate Legislative Developments: Any privatization plan will hinge on congressional action. Investors should watch for signals from the FHFA's November 2025 ResiDay conference, where Director Pulte may provide further clarity.

Conclusion: A High-Stakes Gamble

The GSEs' future is a high-stakes gamble for shareholders. A partial privatization could unlock value, but the risks of rate hikes and regulatory delays are significant. For now, the government's implicit guarantee remains the GSEs' most valuable asset—and its removal could be more damaging than its retention. Investors should proceed with a measured approach, focusing on long-term stability over short-term speculation. Those willing to take the plunge should do so with a clear understanding of the volatility ahead and a diversified portfolio to weather the storm.