We live in a world with big numbers. Almost daily the news is filled with Wall Street deals that erase former notions of size and value, much of it now related to AI and its potential to change the world. But AI is not the only place to find supersized figures. There’s talk that the government might sell off some or all of Fannie Mae and Freddie Mac, mortgage giants that could generate AI-like valuations in an initial public offering (IPO), perhaps as much as $500 billion.
William J. Pulte, director of the Federal Housing Finance Agency (FHFA), the government authority that regulates both Fannie Mae and Freddie Mac, has offered mixed messages regarding when a possible IPO might take place or even if there will be one. As Pulte wrote in late October, an IPO could come “as early as late 2025 but could be Q1 or Q2 2026. We shall see! It is up to the President what to do, if ANYTHING!”
Meanwhile, many investors think the two companies are in play. Freddie Mac stock went from $1.22 on November 1, 2024, to $9.53 on October 31, 2025. During the same period, Fannie Mae shares moved from $1.30 to $10.21.
The implications from a Fannie Mae/Freddie Mac IPO are complicated, twisty, and hardly certain. Privatization could provide an enormous cash infusion for the federal government and big benefits for other stakeholders, but what will happen with borrowing costs, loan rates, and mortgage availability?
Fannie Mae, Freddie Mac & The Magic Cash Machine
The cash generated by Fannie Mae and Freddie Mac explains their IPO potential. These are massive, enormously profitable organizations that are central to vast numbers of real estate transactions. Fannie Mae was guaranteeing mortgages worth $4.1 trillion and had $3.9 billion in net revenue during the third quarter. Freddie Mac in the same period had $2.8 billion in net income and was backing mortgages worth $3.6 trillion.
An IPO involving Freddie Mac and Fannie Mae—government-sponsored enterprises, or GSEs—is something many stakeholders would welcome.
- Right now the biggest IPO beneficiary would be the federal government. The government holds “warrants representing an ownership stake of 79.9% in each GSE.” Some or all of the federal interest could be sold in the event of an IPO, depending on how much cash the government wanted to raise.
- The federal government will get a huge cash infusion from a Fannie Mae/Freddie Mac IPO without raising taxes, a politician’s dream.
- Private shareholders might see investment values increase further, as happened during the past year or so.
- Wall Street loves a big IPO. A successful Fannie Mae/Freddie Mac IPO would generate huge revenues for investment banks as well as investors who bought when shares were cheap.
A $500 billion IPO figure is widely mentioned, but to generate such a massive amount, much or all of the federal stake will have to be sold. An alternative is to sell a small percentage, perhaps 5%, raise $15-$25 billion, and then retain control of both Fannie Mae and Freddie Mac in a conservatorship. A $25 billion IPO would be among the largest on Wall Street.
However, a Fannie Mae/Freddie Mac IPO is not a done deal. Any proposed sale will set off a number of complex questions, including these major issues.
Will GSA Fees Rise?
According to the National Association of Realtors, 30% of all existing home sales in September were all-cash purchases, while the rest—70%—were financed. This is why Fannie Mae and Freddie Mac are important. They are companies created by the federal government but with public shareholders and special rules. The two firms are major players in the secondary market, an electronic shopping mall where mortgages are bought and sold worldwide. Together, they were involved with 57.4% of all outstanding residential mortgages at the end of the second quarter.
Fannie Mae and Freddie Mac buy mortgages from lenders, package them into mortgage-backed securities (MBS) that can include thousands of loans, guarantee that MBS payments will be made, and then sell MBS interests to investors. Cash from MBS sales gives Fannie Mae and Freddie Mac funding to buy more loans, thus ensuring that real estate financing is always available, even in small towns and remote areas.
According to the FDIC, there are two types of fees charged by Fannie Mae and Freddie Mac: annual guarantee fees as well as upfront loan-level price adjustments (LLPAs). How much lenders—and ultimately borrowers—pay depends on such factors as the amount down, borrower credit scores, and whether the financing allows cash to be taken out.
Various fees give Fannie Mae and Freddie Mac money to pay off MBS investors in the event of a loss. With less risk, investors are willing to accept lower interest levels, something that holds down mortgage rates, increases affordability, and brings vast amounts of money into the mortgage marketplace—including investment funds from overseas.
Differing Goals
The federal government wants to encourage real estate affordability and thus has an incentive to keep fees low. That’s one way to stimulate local economic activity and make voters happy.
IPO investors and securities owners in general have a different goal. They hope to maximize shareholder value (MSV) with increased dividends, rising stock prices, and maybe a buyback now and then. Companies with consecutive dividend increases over the long term include such familiar and well-regarded names as Procter & Gamble (69 years), Johnson & Johnson (63 years), and Coca-Cola (also 63 years).
Fannie Mae and Freddie Mac can generate larger revenues by increasing fees. Lenders will then pass through such charges to borrowers in the form of higher mortgage rates, and that’s a problem.
“For potential buyers,” said the Urban Institute in 2023, “increased monthly payments can reduce the share of available affordable homes, pricing them out of the market. Additionally, higher interest rates mean fewer homes on the market, as existing homeowners have an incentive to hold on to their home to keep their low interest rate.”
Bigger fees might make MSV sense, but they conflict with traditional GSE goals. The clash between long-time ideals and investor expectations raises a central IPO question: Will Fannie Mae and Freddie Mac raise fees after an IPO, or will limitations be imposed?
How Will GSE Profits Be Used?
The federal government placed Fannie Mae and Freddie Mac into a conservatorship in September 2008, during the mortgage meltdown, to “restore them to a sound and solvent condition so they can continue to fulfill their statutory missions.” It ultimately advanced $119.8 billion to Fannie Mae, while Freddie Mac got $71.7 billion, a total of $191.5 billion. In turn, the two GSEs repaid $301.045 billion to the Treasury.
Not only did the government pocket almost $110 billion in addition to the full repayment of the advances, it got another $29.3 billion under the Temporary Payroll Tax Cut Continuation Act of 2011.
Fannie Mae and Freddie Mac were required under this law to increase guarantee fees by .10% from April 1, 2012, to October 1, 2021. This additional cost to lenders, which was passed through to mortgage borrowers, was designed to make up the cost of a temporary payroll tax cut—something wholly unrelated to mortgages, home sales, or refinancing.
No doubt IPO investors will want to know how Fannie Mae and Freddie Mac profits will be distributed. Will Uncle Sam be just another shareholder, getting dividends based on the shares it owns? Or will it reach into GSE coffers when it needs cash?
Profits from Fannie Mae and Freddie Mac could also be used to increase MBS purchases. The Community Home Lenders of America and the Independent Community Bankers of America asked the Treasury Department in October to increase the amount of mortgage-backed securities bought by Fannie Mae and Freddie Mac. They argued that such purchases could push down mortgage rates by as much as .3%, a benefit for mortgage borrowers.
Lastly, Fannie Mae and Freddie Mac could use their capital to buy shares of leading tech companies, something discussed in a November article by Bloomberg.
Whether the GSEs can make such investments is unclear. There are limits regarding how cash from Fannie Mae and Freddie Mac can be used, but—as we have seen—it’s also true that the government took GSE money to offset payroll taxes. Expect a hot debate if Fannie Mae and Freddie Mac seek equity ownership in leading technology companies.
Will Marketplace Stability Be Maintained?
Fannie Mae and Freddie Mac promise the timely repayment of MBS principal and interest to MBS investors if a loan is foreclosed, assurances funded with fees paid by lenders. But they also enable marketplace stability in other ways.
The two GSEs only purchase mortgages that meet certain standards. Such loans must have so much down, creditworthy borrowers, mortgage terms that generally run 30 years, and financing that’s self-amortizing, among other requirements. These “conforming” loans protect borrowers, lenders, and investors because they exclude predatory terms, hidden costs, and needless foreclosures.
Because they only deal with conforming mortgages, Fannie Mae and Freddie Mac MBS are inherently conservative financial products. They do not include toxic financing or allow lax underwriting.
As a result of the way the mortgage market is structured, there’s little risk to borrowers, lenders, or investors. All core players get something out of the system.
- Borrowers with conforming loans are protected against predatory gotcha
- More than 95% of all US mortgages have fixed rates and 30-year terms. Most existing borrowers don’t have to worry about payment shock if rates surge.
- Lenders have a market where they can quickly sell conforming loans to raise fresh cash. That cash can be used to finance a new round of conforming mortgage originations that in turn can be sold into the secondary market.
- Sellers have a ready pool of potential buyers, individuals with access to financing on a reasonable basis.
- The MBS system brings money into the US mortgage marketplace, thus holding down borrower costs. It’s not just US investors that support the national real estate marketplace; it’s investors worldwide who see the US real estate market as uniquely safe and secure.
Marketplace stability is a central value created by the secondary loan market, but what happens after an IPO? Will Fannie Mae and Freddie Mac be allowed to accept toxic loans with risky provisions that could lead to steeper foreclosure rates?
Will Fannie Mae and Freddie Mac Remain Unique?
Fannie Mae was created in 1938 under the New Deal to ensure that mortgage money was available nationwide, even in places where local banks had failed. Later, in 1970, Freddie Mac was created by the government to boost competition in the secondary market. These programs remain at the center of the mortgage financing system we have today.
Fannie Mae and Freddie Mac are considerably different when compared with typical business organizations.
- The GSEs are exempt from state and local taxes, except for property taxes.
- Although Fannie Mae (FMCC) and Freddie Mac (FNMA) were started by the federal government, shares in both companies are available for purchase by individuals and institutions.
- The Treasury Department says more than 700 financial institutions received help under the 2008 Troubled Asset Relief Program (TARP). That program stopped distributing money in 2010 and officially ended in 2023. Fannie Mae and Freddie Mac received funding through the Housing and Economic Recovery Act of 2008 (HERA). Even though the two GSEs fully repaid their advances, the conservatorship continues.
- Fannie Mae and Freddie Mac have been able to acquire investor cash at little cost because of the expectation that if they faced financial failure, they would be bailed out by the US Treasury, thus protecting MBS investors. Because of low capital costs, the GSEs have been able to hold down mortgage interest rates.
Will things be different with an IPO? Two big questions are open.
First, will the two companies continue to be exempt from state and local income taxes? You can bet that various tax authorities will want a piece of the action if the two companies are entirely sold off.
Second, IPO investors will seek guarantees assuring that Fannie Mae and Freddie Mac will be backed by the full faith and credit of the United States. The situation right now is murky. As the Schwab Center for Financial Research points out, “Government-sponsored enterprises do not have the explicit backing of the U.S. government. Although GSEs are considered to have the implicit backing of the government, they are not backed by the full faith and credit of the U.S. government.”
Will IPO investors get their explicit guarantees? It’s unclear at this writing, and it may remain uncertain if there’s an IPO, as has been the case for decades.