GSEs' futures to remain uncertain, possibly for years: KBW

It is becoming increasingly unlikely that a government-sponsored enterprise privatization will be a no-go for 2026. But the administration acting in 2027 is also becoming the victim of what Keefe, Bruyette & Woods termed a narrowing timeline.

This means one of the biggest uncertainties about privatization, the implicit guarantee, will not be addressed. In turn, it might lead to pushback from the mortgage industry against privatization, even though Pres. Trump has posted on social media that the government would keep the implicit guarantee in place.

Plus, in spite of pleas from the industry, loan level price adjustment revisions also have not been brought out.

"While there could be actions taken after the midterms, we think the timeline is narrow because the focus of the administration likely will switch to the Presidential elections, starting in 2028," Bose George of KBW wrote. "And while a change of control in Congress is not necessarily a direct impediment to GSE privatization, we think it could further reduce the administration's focus on GSE privatization by slowing down the broader Republican political agenda."

In 2025, former Freddie Mac CEO Donald Layton said it was unlikely GSE reform would happen before 2028.

KBW cut its price targets for both companies to $3.50 per share from $6.25 for Fannie Mae and $6.50 for Freddie Mac, reflecting a lower likelihood of privatization, 30% from 50%. Earnings per share outlooks were unchanged.

"Further, even if GSE privatization occurs, we think there is significant dilution risk if Treasury's preferred position is converted to common, and this is incorporated into our price targets," the research report said.

Stock prices move lower for most mortgage players

KBW sent out the report on Sunday afternoon. Monday morning Freddie Mac opened at its Friday close of $4.16 per share but by 2 p.m., was down to $3.96, according to Yahoo Finance.

Similarly, Fannie started Monday unchanged from the Friday close at $4.67 per share but was down to $4.29.

Probably not helping any mortgage company's stock price was an increase in the 10-year Treasury yield of another 6 basis points to 5.25% at closing.

The KBW report did note the government has the option, besides converting the senior preferred shares, to simply forgive them.

In either case, the GSE capital position would equate to the company's GAAP equity, but the difference would be the common share count if converted.

As for ongoing litigation regarding the 2012 Preferred Stock Purchase Agreement amendments and the net worth sweep, in which the shareholders have prevailed, "we continue to think this litigation will not derail any eventual recapitalization or exit from conservatorship, though shareholders have recently had some success in court," the report said.

KBW's biggest impediment to privatization is minimum required capital levels created during the first Trump Administration. Under those, Fannie Mae and Freddie Mac are undercapitalized by $174 million combined.

George thinks return on equity levels at a minimum have to be around 12% or 13% for the shares to attract private capital and trade above their book value.

Has GSE retained portfolio net purchase volume slowed?

Separately, both companies released their August monthly summaries, which indicated their respective retained portfolios shrunk when compared with July.

This data covers a period prior to Federal Housing Finance Agency Director Bill Pulte's X post saying, "We are beginning to buy even more, large quantities, as we speak," in response to published reports regarding the July drop off in the retained portfolios.

Fannie Mae as of the end of August had a retained portfolio of $172.6 billion, versus $173.4 billion in July.

Freddie Mac, which the Community Home Lenders of America took to task for sitting on the sidelines in a letter to Pulte and Treasury Secretary Scott Bessent, ended August at $138.5 billion, compared with $139.7 billion the prior month. Each company remains below its cap of $225 billion as per the PSPAs.

Since last August, Freddie Mac's portfolio increased by about $25 billion, but Fannie Mae's grew by more than three times as much, almost $79 billion. The activity started increasing even prior to Pres. Trump's call for $200 billion in MBS purchases.

But this month's acquisition trend is likely to be different, George wrote in a separate flash note.

"While agency MBS spreads had remained fairly controlled in August, they have widened quite meaningfully in September driven by higher interest rates," George said. "So we would expect GSE purchase activity to be stronger in September, consistent with what…Pulte posted on X."

Spreads between agency MBS and the 10-year are now at 110 basis points, compared with 95 basis points on June 30 and 99 basis points on Aug. 31, George pointed out.

"We expect the GSEs to continue to be active in the agency MBS market, which should help stabilize spreads," he continued. "However, the main driver of higher mortgage rates this year has been the sharp increase in the 10-year Treasury (up 120 basis points since February) and not spreads, up a little over 20 basis points since then."