Even with Recent Surges in Trading, The Chances of Fannie and Freddie Being Privatized Are Low

The potential privatization of Fannie Mae and Freddie Mac under the Trump administration has sparked intense debate among investors, economists, and policymakers. While hedge fund managers such as Bill Ackman have long championed privatization, arguing it would unlock significant shareholder value, the process remains complex and fraught with economic and regulatory hurdles. The recent surge in Fannie Mae’s stock price—up over 400% since Trump’s re-election—suggests that market participants view privatization as more likely than they had previously. However, assessing the true probability requires a deep dive into financial, political, and macroeconomic factors.

Market Pricing and Investor Sentiment

Shares of Fannie Mae have surged in anticipation of privatization, with investors expecting a dramatic increase in valuation. Bill Ackman estimates that a fully privatized Fannie Mae could be worth $34 per share, far exceeding the current trading range of $5-$6. This implies that the market currently assigns a 15-20% probability to full privatization at the projected valuation.

To estimate the market probability of privatization, we can use a simple expected value model:

• Ackman’s projected full privatization price: $34 per share
• Current trading price range: $5-$6 per share
• Implied probability (p) of full privatization:
  This equates to a roughly 17% probability of full privatization.

This aligns with Ackman’s suggestion that the market is heavily discounting the possibility of privatization occurring, despite the optimism from certain investors.

Economic and Housing Market Implications

Fannie Mae plays a crucial role in the U.S. housing market, owning or guaranteeing nearly 50% of all residential mortgages and creating a $6.6 trillion secondary mortgage market. The potential consequences of privatization include:

1. Higher Mortgage Rates: Without government backing, mortgage-backed securities (MBS) could face higher credit risk, leading to increased mortgage rates. Moody’s Analytics estimates that rates could rise by 0.25-0.50 percentage points, making homeownership more expensive.
2. Liquidity Risks in the MBS Market: Investors currently treat Fannie and Freddie-backed securities as quasi-Treasuries. If privatization removes the implicit government guarantee, capital requirements for banks, pension funds, and insurance companies holding MBS may increase, reducing liquidity in the mortgage market.
3. Potential Loss of Affordable Housing Initiatives: Fannie and Freddie’s role in subsidizing loans for lower-income borrowers may be diminished post-privatization, raising affordability concerns for first-time homebuyers.

Financial and Legal Challenges

Privatization would require resolving the U.S. Treasury’s ownership stake. The government holds senior preferred shares in Fannie Mae, with an entitlement of $330 billion in a liquidation scenario. Key hurdles include:

• Eliminating or Converting Treasury’s Stake: The Treasury’s senior preferred shares and 79.9% common stock warrants must be addressed. If converted into common stock, this could heavily dilute existing shareholders.
• Capitalization Requirements: Regulators may require Fannie and Freddie to hold significantly more capital post-privatization, reducing their profitability. Ackman and other investors argue that existing capital requirements are excessive. However, the political reality is that Congress would only approve privatization if Fannie and Freddie possessed gigantic amounts of capital, enough to make a future bail-out unnecessary.
• Congressional Approval: While Trump has expressed intent to privatize Fannie and Freddie, Congress would need to pass legislation to approve it. Moreover, they would need to formalize an explicit government guarantee or risk significant market disruption. Given the trend for midterm elections to favor the party previously out of power, it is unlikely that Trump will have the necessary Republican majority in both houses he would need to press forward with privatization. 

Risks to Privatization

Despite investor enthusiasm, significant risks remain:

1. Political Uncertainty: Privatization has been debated for over a decade with little progress. The Biden administration previously opposed privatization, and a shift in political leadership could derail efforts.
2. Regulatory Resistance: The Federal Housing Finance Agency (FHFA) and the Treasury Department may prioritize stability over privatization, particularly given the importance of Fannie and Freddie in the housing market.
3. Market Disruptions: If the MBS market reacts negatively to privatization efforts, financial institutions may resist the transition, leading to broader economic uncertainty.

Conclusion

Market expectations for Fannie Mae’s privatization are much higher than they were, as reflected in the sharp rise in stock prices. However, while the probability of privatization has increased under Trump, substantial financial, political, and economic hurdles remain. Using Ackman’s valuation estimates, we can infer that the market currently assigns a 17% probability to full privatization, a figure that reflects both investor optimism and significant skepticism. Investors betting on full privatization should consider both the upside potential and the significant risks associated with the restructuring of one of the most critical entities in the U.S. housing market. The coming months will provide further clarity, particularly as Trump’s administration outlines its financial policy agenda.

Franklin Carroll

Franklin Carroll is Kukun's VP of Modelling and Analytics; After finishing his studies at the University of Chicago, he worked at Fannie Mae where he helped build Collateral Underwriter, roll out the Value Verify initiative, and specialized in collateral related and credit related policy.

Published March 4, 2025