Keefe, Bruyette & Woods, while still expecting robust profits from Fannie Mae and Freddie Mac, has dimmed its outlook on both companies' earnings per share potential as probabilities for a release from conservatorship increase.
The stock rating for both are, and will remain at, underperform. KBW, in its fine-tuning of the earnings models, reduced earnings per share expectations for each company by about 10% over the next three years.
In August, President Trump, on social media, put out a posting on
But the KBW report treats each company as being released from conservatorship separately.
In a Sept. 2 interview with Fox Business, after being asked about comments from Treasury Secretary Scott Bessent, Federal Housing Finance Agency Director Bill Pulte said the government could sell a 5% stake through a public offering that might happen this year, although it was not clear whether he was speaking about each company or both in combination.
For 2025, KBW dropped Fannie Mae's EPS to $2.43 from the prior $2.60, and then to $2.49 and $2.52 from $2.86 in both 2026 and 2027. Freddie Mac EPS estimates are now $3.21, then $3.52 and $3.69 from KBW's past expectations of $3.53, $4.13 and then $4.23.
This change represents a further reduction from
In total, the newest reductions equate to approximately $26 billion of post-tax earnings. Excluding $2.4 billion of junior preferred stock expenses, collective earnings for both companies should increase by around $2 billion to $3 billion.
"This primarily reflects the benefit of slightly lower rates and rising prepayments, which accelerate the recognition of up-front guarantee fees," the report from Bose George and Frankie Labetti said. "We also expect modest portfolio growth."
Guarantee fees are the primary driver of revenue at both companies, with about one-quarter coming in up-front and the rest annually. But the upfront portion, also called loan level price adjustment in Fannie Mae parlance, is deferred and earned over the life of the loan.
"As a result, guarantee income usually dips when prepayments are low and vice versa," KBW said. "That's the main reason we expect guarantee income to trend up as interest rates trend down, pushing up prepayments."
But in spite of KBW's robust earnings forecast for both companies, it maintained "a cautious view" on their common stock.
"Our price target is based on 1.5 times book value and assumes a 30% chance that the privatization fails and a 60% chance that the common equity is wiped out as senior preferred shares are converted at close to zero," George and Labetti wrote.
"While we acknowledge that there is a range of outcomes based, we believe that there is downside to the common shares unless the privatization succeeds and the government's senior preferred shares and
The liquidation preference applies to the senior preferred stock the U.S. government holds. It has been growing as a result of the net worth sweep ending and both companies being allowed to retain earnings.
According to previous reports, Freddie Mac's liquidation preference will be $137.5 billion at the end of the third quarter, while for Fannie Mae it will be $223.1 billion.
KBW's price target for Freddie Mac is $4.50 per share, while for Fannie Mae, it is $4. Both companies are trading well above this level as they have seen their stock prices soar as speculation the conservatorships are close to an end abounds.
On Sept. 2, after the Pulte interview, Freddie Mac closed at $9.72 per share, up 30 cents, while Fannie Mae ended the day's trading at $11.32, 3 cents per share higher.
— Bonnie Sinnock contributed to this report
