A Matter of Facts

~ jtimothyhoward

Statements over the past several weeks by President Trump, Treasury Secretary Bessent and FHFA Director Pulte strongly suggest that the administration is intent on addressing the status of Fannie Mae and Freddie Mac, whose conservatorships soon will complete their seventeenth year. Both President Trump and Director Pulte have called attention to the companies’ excellent financial condition, and Pulte has indicated that the administration is focusing on alternatives for “monetizing” its stakes in them. How much, though, might they realistically be worth, and what will determine that value?

Fannie and Freddie have been exceptionally profitable for over a decade. Following the years 2012 and 2013—when much of their temporary or estimated non-cash expenses booked between the second half of 2008 and 2011 reversed and came back as $162 billion in net income (half again what they had earned over their entire histories)—the companies’ average annual net income over the next five years, ending in 2018, was $18.5 billion, and over the following five years ending in 2023 it was $24.4 billion. They earned $28.8 billion in 2024, or $36.0 billion pre-tax, with combined credit losses of less than $1.0 billion.

If they were average members of the S&P 500, trading at a trailing price-earnings (P/E) ratio of 27 to 1, Fannie and Freddie’s combined market capitalization would be almost $780 billion. But they are not; they are financial companies, with a “special relationship” with the government. That special relationship resulted in their being forced into conservatorship in 2008—in spite of  being in full compliance with their applicable capital standards—by Treasury Secretary Hank Paulson, who was not comfortable having to rely on them as shareholder-owned companies to get the country through the mortgage crisis, after the private-label securities market had imploded in the fall of 2007 and commercial banks had greatly pulled back on their residential mortgage lending because of soaring delinquencies. For virtually all of the time since their conservatorships, Fannie and Freddie’s P/Es have rounded to zero, and even with the recent optimism about their potential release, their average P/E still is languishing at under 3 to 1, or less than 11 percent of the S&P 500 P/E.

How high might Fannie and Freddie’s P/Es go if they are released from conservatorship? The history on Fannie’s P/E relative to the S&P 500 from my time as its CFO (1990-2004) is useful in framing this question, both quantitatively and qualitatively. After losing money in 1984, Fannie revamped its interest rate and credit risk management in the second half of the 1980s, then experienced a remarkable period of growth in both its book of business and net income, with the latter increasing at an average rate of 17.0 percent per year during the decade of the 1990s. As this was occurring, Fannie’s relative P/E rose steadily, from a 12-month average of 55 percent of the S&P 500 in 1990 to 85 percent in 1998. Yet the same book and net income growth that was driving up Fannie’s relative P/E also was fueling increased opposition from the company’s competitors (chiefly commercial banks), who in the spring of 1999 formed a lobbying group called FM Watch. FM Watch’s goal was to get Congress to pass legislation constraining Fannie and Freddie, and it used misinformation about the companies as its principal tool to try to accomplish this. By the end of 2003, Fannie’s P/E relative to the S&P 500 had fallen to 45 percent, and a survey of its investors disclosed that their greatest area of concern was “Political/Regulatory Risk”.  Interest rate risk—which FM Watch had been greatly exaggerating—was only fourth on that list. 

As this P/E history reveals, Fannie and Freddie’s equity valuation is very sensitive to the investment community’s perception of the political and regulatory environment in which the companies are operating. Today, investors believe Fannie and Freddie should be able to sustain their annual earnings at close to last year’s $29 billion. What keeps the valuation of those earnings at just a 3-to-1 multiple are two major categories of uncertainty: (a) how they will be allocated among Treasury, existing owners of common stock (of which about 80 percent are mutual funds and retail holders, and 20 percent hedge funds) and investors who buy any new shares of common required for the companies to reach full capitalization, and (b) most importantly, how Treasury and FHFA will address and resolve the three issues that have kept the companies in conservatorship for this long, despite their high earnings: their relationship with the government, the disposition of Treasury’s senior preferred stock and liquidation preferences, and their post-conservatorship required level of capital.

Treasury will either determine or strongly influence how all of these depressants to Fannie and Freddie’s valuation are handled, while the investment community will respond to what Treasury does. Investors—at least the large institutional ones—understand the facts about the companies, even if the media and the general public may not. To get maximum value for the shares in the companies it ends up holding, therefore, Treasury must resolve the issues discussed in the sections below to investors’ satisfaction, and in a manner consistent with the facts they know to be true.

Relationship with the government

As soon as officials from the Trump administration began to discuss releasing Fannie and Freddie, interests that benefit competitively and financially from keeping them constrained in conservatorship and grossly overcapitalized concluded that the best argument they had against this move was that it would cause mortgage rates to rise, perhaps sharply, unless what has been termed the “implicit guaranty” on their mortgage-backed securities, or MBS, was replaced with an explicit government guaranty (which no one believes will happen). But this fearmongering ignores the origin and context of the implicit guaranty associated with Fannie’s debt and MBS since it was spun out of the government in 1968 (and Freddie was created, with essentially the same charter, in 1970), and its practical consequence that numerous large investor groups—ranging from U.S. national banks to foreign central banks and foreign official institutions—were authorized to invest in Fannie and Freddie securities in unlimited quantities, thus helping to keep their spreads tight to Treasuries for decades. 

There is a reason why these investor groups believed there was an implicit guaranty on Fannie and Freddie debt and MBS. When Fannie was part of the government for its first 30 years, its debt was explicitly guaranteed, and it also counted in the national debt totals. President Johnson wanted to get Fannie’s debt off the national balance sheet (to free up room to finance the Viet Nam war), and that’s why Fannie was sold to shareholders. The debt of this privatized Fannie Mae couldn’t have an explicit guaranty—otherwise it would stay on the U.S. balance sheet—so to keep its borrowing cost as low as possible the Johnson administration did the next best thing. In the Housing and Urban Development Act of 1968, it gave Fannie’s securities a number of federal attributes, or “indicia”—their designation as government securities under 1933 and 1934 SEC Acts exempting them from registration requirements, eligibility for purchase by the Federal Reserve in open market operations, use of the Federal Reserve banks as clearing agents, and exemption from state and local taxes, among others—intended to create the perception that Fannie debt (and later, when they began issuing it, their MBS) was viewed in a privileged way by the U.S. government. A memo now held in the LBJ Library in Austin, Texas confirms this intent, stating that these indicia would “constitute indirect—but explicitly, not direct—Federal guarantees.” That was very clever, and it worked, right up until the time of the conservatorships.

What has happened since then? Most obviously, when all of Fannie and Freddie’s capital was wiped out by non-cash expenses put on their books between September of 2008 and December of 2011, the government did make good on the implicit guaranty of their debt and MBS. Then, Treasury went further and added an explicit funding backstop in the Senior Preferred Stock Purchase Agreement—which is an agreement with the companies and not FHFA, so it doesn’t sunset when the conservatorships end—and this PSPA has a remaining undrawn balance of $254 billion. Beyond that, today Fannie and Freddie no longer are permitted to be in their riskier pre-conservatorship business of holding mortgages funded by debt in their portfolios, and their credit guaranty businesses have half the credit risk and double the guaranty fee rates they had in 2007. Finally, all of the important federal indicia in their charters that originally gave rise to the perception of an implicit guaranty are still there (Federal Reserve banks have not been the companies’ clearing agents for some time).

So, there is no objective reason for any investor group that hadn’t imposed limits on the amount of Fannie and Freddie securities they could buy prior to the conservatorships to begin doing so once they’re released. And the addition of the explicit PSPA backstop—which the companies presumably would begin paying for, at a rate “mutually agreed by” Treasury, Fannie and Freddie—in combination with their greatly improved risk profiles arguably should be holding MBS to Treasury spreads down, and  helping the breadth of the MBS market to expand. President Trump already has written that “the U.S. government will keep its implicit GUARANTEES” (emphasis in original), but to put this issue completely to rest, Secretary Bessent only has to say something like, “the agency status of Fannie and Freddie’s securities has not changed” when they are released from conservatorship.

President Trump also has written that “I will stay strong on my position on overseeing [Fannie and Freddie] as President.” Some observers have interpreted this statement to imply an intention to try to raise equity while keeping the companies in conservatorship, or to retain some direct government control over them—perhaps using an instrument like the “Golden Share” granted as a condition of the acquisition of U.S. Steel by Nippon Steel—after they are released. Either of these, however, are likely to impose a very low ceiling on the value of Treasury’s stake in the companies. The conservatorships are the reason Fannie and Freddie’s P/Es are so low currently, and the problem with giving the government ongoing control over them is that administrations can change every four years, and this injects considerable (and unhedgeable) uncertainty into their future business, which investors will price for. For this reason, it would be far better for the Trump administration to decide what changes it wishes to make to the companies’ current business model—such as capped, utility-like, returns—and negotiate those as part of a consent decree in conjunction with their return to private management, with continued FHFA regulation and oversight.

Disposition of Treasury’s claims

Treasury’s dilemma is that it has claims on Fannie and Freddie that exceed their realizable value. For Fannie, Treasury granted itself warrants for 79.9 percent of the company’s common stock, has $120.8 billion in senior preferred stock, and currently has an additional liquidation preference of $99.0 billion, which grows with Fannie’s quarterly earnings. For Freddie, Treasury holds warrants for 79.9% of its common stock, has $72.6 billion in senior preferred stock, and a $62.4 billion (and growing) additional liquidation preference.

There are two reasons for Treasury to resolve its claims dilemma by retroactively cancelling the non-repayment provision of its Senior Preferred Stock Agreement, and recasting as repayments of principal those amounts of the $246 billion in net worth sweep payments the companies made after 2012 that were in excess of a 10 percent dividend on the prior quarter’s balance of outstanding senior preferred stock, thus paying it off entirely at an internal rate of return of 11.4 percent. (Doing so also would eliminate Treasury’s ever-growing additional liquidation preference.) The first is that the investment community knows that neither company needed anywhere near the $191.4 billion of senior preferred they were forced to take (the other $2.0 billion they had to pay for in 2008), and that even so they still have paid Treasury that amount plus $110.0 billion more. The second reason is that, merit aside, it almost certainly is in Treasury’s best interest to deem the senior preferred to have been repaid, rather than convert it to common stock.  

We’ll start with the facts, which are readily discernable in Fannie and Freddie’s published financial statements. At December 31, 2007, Fannie had $44 billion in capital, and Freddie had $27 billion. Then, between 2008 and 2011, the companies combined did suffer $101 billion in credit losses. But during that same period, anyone could see that their operating revenues—net interest income, guaranty fees and other fee income—were enough to cover not only those credit losses but also their $16 billion in administrative expenses. So, on an operating basis, the companies would not have needed even to dip into the $71 billion they had in capital, let alone take any senior preferred stock from Treasury.

Why, then, did they? Again, that’s easy to see from their financial statements. Between the time they were put into conservatorship through the end of 2011, FHFA required them to book $326 billion in non-cash expenses, the large majority of which were either temporary, based on estimates, or advanced from future periods. These broke down as $100 billion in valuation reserves for their deferred tax assets, $124 billion in additions to their allowances for loan loss (which were made on top of the $101 billion in credit losses they recorded), $53 billion in impairments or write-downs on their non-agency MBS, and $49 billion in other non-cash expenses.

After the fact, we learned that none of the $100 billion in deferred tax asset reserves were justified (they all were reversed), that less than half of the $124 billion in increased loss  allowances were needed to cover all of the companies’ credit losses over the next five years, and that virtually none of the $53 billion of impairments and write-downs on non-agency MBS—which were driven by price weakness, not credit concerns—turned into realized losses. These items alone totaled over $200 billion, more than all of the $187 billion Fannie and Freddie had to take during this period, and were not allowed to repay.

Nearly every article about Fannie and Freddie’s potential release from conservatorship states that they still owe Treasury for their “rescue,” but investors in the companies know this is not true. Treasury has to realize, therefore, that if it elects to increase its holdings of the companies’ common shares from the 79.9 percent it already has through the warrants to a percentage somewhere in the 90s—by converting its senior preferred stock (or its entire liquidation preference) to common, while falsely claiming it is “owed”—the investors whose holdings will have been diluted by more than half assuredly will react by putting a much lower price on the 90-plus percent of the Fannie and Freddie shares Treasury now must try to sell than they would have paid for the 79.9 percent of shares Treasury still will have if it truthfully acknowledges that the senior preferred stock has been fully repaid.   

Required level of capital

Today, there are two “benchmarks” for Fannie and Freddie’s required capital: (a) per the January 14, 2021 letter agreement between former Treasury Secretary Steven Mnuchin and former FHFA Director Mark Calabria, they must have Common Equity Tier 1 (CET1) capital equal to 3 percent of their adjusted total assets for two consecutive quarters to be eligible to be released from conservatorship, and (b) they need to fully meet the risk-based component of Calabria’s Enterprise Regulatory Capital Framework (ERCF) to be considered adequately capitalized. As of March 31, 2025, Fannie and Freddie combined were $330 billion below their threshold for release from conservatorship, and $389 billion below being adequately capitalized. Cancelling or converting Treasury’s $193 billion of senior preferred would reduce both companies’ CET1 and risk-based capital shortfalls by $206 billion (with the extra $13 billion coming from a lower capital deduction assessed by FHFA for their deferred tax assets), but still leave their CET1 capital $124 billion short of their release point, and their total ERCF capital $183 billion short of adequate capitalization.

Those are very wide capital gaps to bridge with new issues of equity, and the investment community knows there is no reason to attempt to, because both of these “Calabria capital requirements” are set at arbitrarily and indefensibly high levels. It is well documented that Calabria came into the position of Director of FHFA with a predetermined goal of giving them “bank-like” capital requirements, even though they have no business in common with banks. He took the 2.5 percent minimum capital requirement of FHFA’s June 2018 capital standard and added a 1.5 percent “Prescribed Leverage Buffer Amount” (or PLBA) to it, raising it to 4.0 percent, then added enough buffers, cushions, minimums and add-ons to the risk-based requirement of the 2018 standard (which already was unrealistically conservative, because it assumed that guaranty fees on loans that remained outstanding during periods of stress test absorbed no credit losses) to push its required capital above his arbitrary 4.0 percent minimum.

Since 2021, neither Fannie nor Freddie have required any initial capital to survive their annual Dodd-Frank stress tests, which are designed to replicate or exceed the decline in home prices experienced during the Great Financial Crisis. Yet at March 31, 2025, Fannie and Freddie’s weighted average risk-based capital requirement under the ERCF was 4.34 percent of their total assets. Today, their only significant risk is residential mortgage credit risk. Fannie and Freddie’s average annual credit loss rate for the past five years has been less than one basis point, and prior to the Great Financial Crisis it never exceeded 11 basis points. The companies’ average single-family guaranty fee last year was 48 basis points, and it will rise further because their average fee rate on new single-family loans in 2024 was 55 basis points. FHFA may not recognize the loss-absorbing capacity of the companies’ profuse flow of guaranty fees ($36 billion last year) in setting their risk-based capital requirements, but that doesn’t make it disappear. Investors know that the ERCF is irreparably flawed, and that for Fannie and Freddie to become attractive investments again it must be replaced.

Fortunately, there is a simple fix to the ERCF that could be done fairly quickly, through regulation. First, remove the PLBA—which FHFA Director Thompson changed from 1.5 percent to half the amount required by the “stability buffer” in the risk-based component of the ERCF—that Calabria added to FHFA’s 2018 minimum capital requirement, putting it back at 2.5 percent (of total assets, not Calabria’s concocted “adjusted total asset” concept). Then, declare that until the risk-based standard can be re-done and re-promulgated, this 2.5 percent minimum will be binding as long as the severely adverse Dodd-Frank stress tests run annually on the companies result in required initial capital of 1.5 percent or less (without FHFA’s imposed deferred tax asset reserve). Finally, Treasury and FHFA will need to cancel or amend their January 14, 2021 letter agreement that set 3.0 percent CET1 capital as the threshold for releasing the companies from conservatorship.

With these straightforward changes, the exceptionally high quality of Fannie and Freddie’s books of single-family credit guarantees today—current loan-to-value ratios of 50 percent for Fannie and 52 percent for Freddie, and 77 percent of Fannie’s guaranteed single-family mortgages having a note rate of 5 percent or less (Freddie does not publish this figure)—would make their 2.5 percent minimum capital requirement binding for the foreseeable future, and thus give clarity to their ownership structures. Deeming the senior preferred to be repaid would leave Fannie only $13.1 billion short of adequate capitalization as of its March 31, 2025 statement date, while Freddie would be $23.1 billion short. Each would have the option of reaching full capitalization through retained earnings, or by issuing only minimal amounts of dilutive new equity.

The adverse treatment of Fannie and Freddie’s shareholders over the past 17 years makes it difficult to estimate what price-earnings ratio relative to the S&P 500 might be attainable for their common shares post-conservatorship. But Fannie’s relative P/Es during my time as CFO may offer some insights. While the 85 percent relative P/E Fannie reached in 1998 is very likely unachievable any time soon, the 40 percentage-point range of relative P/Es between that 85 percent—from when investors were focused mainly on the company’s earnings—and the 45 percent to which Fannie’s relative P/E fell when its investors said they were most concerned about political risk (in 2003), is probably a good estimate of the minimum amount of investor sensitivity to political and regulatory risk today. If so, there would be at least a $300 billion difference between the value investors would put on Fannie and Freddie’s common shares if Treasury resolves their governmental, senior preferred stock and capital issues in an investor-friendly manner, based on facts, compared with the value investors would put on them if Treasury keeps the companies in conservatorship or under government control, pretends that they need to further “repay” senior preferred stock they neither needed nor asked for, or requires them to attain made-up capital levels that bear no relation to their business risk. That is a tremendous amount of incremental value to be gained—with at least $240 billion going to Treasury—just for acknowledging and following the facts about Fannie and Freddie in the process of releasing them.

64 thoughts on “A Matter of Facts”

  1. Tim,

    Would love to hear your comments on Bill Ackman’s proposal, as well as your opinion on where things stand with the IPO progress, etc. Thanks!

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    1. I view the proposal made by Bill Ackman last week as a formal recognition of the reality of where we now stand.

      He and I each believe that for the administration to receive anything close to the inherent value of its stakes in Fannie and Freddie (which I would peg as being in the range of $250 to $350 billion), three steps have to be taken: first, the companies need to be put on a clear path to release from conservatorship, led by competent, experienced and independent private management; second, Treasury has to resolve the issue of its senior preferred stock and liquidation preference, preferably (and in Treasury’s best interest) by deeming the former to have been repaid, and cancelling the latter, and third, it must remove the excessive conservatism of former FHFA Director Mark Calabria’s ERCF capital standard, so that the companies can earn a market return on their capital while pricing their credit guarantees on an economic basis.

      Unfortunately, the first and the third of these steps fall under the purview of FHFA Director Bill Pulte, who has shown no signs of interest in taking either of them. To the contrary, he has been an outspoken advocate or keeping Fannie and Freddie in conservatorship for the balance of President Trump’s term in office, with himself as their chairman (in “black letter” violation of the clause in FHFA’s enabling statute, the Federal Housing Enterprises Financial Safety and Soundness Act of 1992, which states, “the Director and each of the Deputy Directors may not…(2) hold any office, position or employment in any regulated entity or entity-affiliated party”). And if Pulte ever has acknowledged the stark contradiction between the capital required of the companies by the ERCF (4.40 percent of total assets in the third quarter of this year) and their ability over the past five years to pass their annual Dodd-Frank Severely Adverse Stress Tests with ZERO initial capital, I am unaware of it.

      There can be little doubt that both Ackman and Treasury Secretary Scott Bessent have been getting an earful from the investors they speak with that there is no chance they will put any serious amount of money into Fannie and Freddie as long as someone as inexperienced and unpredictable as Bill Pulte is running them in conservatorship as political playthings. And I am quite confident that Bessent, who is no fan of Pulte, has passed along this information to the president. Yet at least up until now, the president has been standing by Pulte. Given that, it is completely understandable that Ackman would propose splitting the Fannie and Freddie “recap and release” process into two parts, first taking the one step under Secretary Bessent’s control—dealing with the senior preferred stock and the liquidation preference—now, then waiting to take the other two steps—“finalizing the GSE capital levels going forward” and charting a path out of conservatorship under independent private management–at some future date, with the (barely concealed) assumption that these would be done when Bill Pulte no longer is regulator, conservator and chairman of Fannie and Freddie. When that might be, though, is the $300 billion-dollar question.

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      1. Thanks Tim. We understand why Ackman would want this 2-step process, as it lets him exit the investment quickly.

        But how does it benefit the taxpayer or Treasury to give up all their leverage, continue to provide an implicit guarantee, and leave Pulte solely in charge for 3 more years? What is the public benefit of taking Step 2 without 1 & 3 alongside?

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        1. I’m not making a prediction as to whether or not what Bill Ackman has recommended will happen. But I will say that IF the goal of Treasury is to maximize the value of its proceeds from the sales of its stakes in Fannie and Freddie, then I believe the best move it can make on the senior preferred is to deem it repaid rather than convert it to common stock, because as I’ve often said the main victim of such a conversion would be Treasury itself, as owner of warrants for 79.9 percent of that common. I don’t view a threat to do something harmful to oneself as “having leverage.” The reason Treasury might elect to deal with the seniors now is to remove one of the main elements of uncertainty about the valuation of the companies. And, yes, should it do so the value of the common shares of Bill Ackman and other holders of Fannie and Freddie common would very likely increase, but Treasury‘s far larger claims on the companies’ common would increase in value as well.

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      2. Tim,

        Regarding your point that Pulte is in violation of the clause in FHFA’s enabling statute (by acting as chairman of both entities), do you in anyway see this as a ‘red herring,’ or a future stumbling block to any agreement (ie. consent or otherwise) that may serve as an agreed-upon path to exit and end the conservatorship if Pulte is director at the time of signing the agreement? I would think those opposed to exiting the conservatorship would try to use this violation as an impediment to enforcing any agreement entered. Thank you for any thoughts you may provide.

        Jack

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        1. My rationale for pointing out the clause in FHEFSSA prohibiting the Director of FHFA from having any position in the companies is that I’ve never seen this mentioned in any article about Pulte, and I believe people ought to be aware of it. It’s yet another reason for thinking that Secretary Bessent is highly unlikely to move forward on any partial sale of Treasury’s stakes in Fannie and Freddie as long as Pulte has any significant influence over them–whether as regulator, conservator or chairman.

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          1. Yet isn’t it true that Bessent’s supposed knowledge of this apparent Pulte violation hasn’t kept him (Bessent) from talking about a relatively imminent secondary offering?

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          2. It’s not an “apparent violation;” it’s a violation (to paraphrase Justice Frankfurter, “read the statute, read the statute, read the statute”). And I’m not aware of any recent statement by Bessent referencing a “relatively imminent secondary offering.” Also, if and when there is a secondary offering by either company (or both), there will need to be a roadshow laying out the investment case for potential investors. It’s hard for me to envision Bessent relying on Bill Pulte to make that case, and I don’t see how that can be avoided as long as he’s chairman of both companies.

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  2. This is all getting downright bizarre. Cryptic mentions of “tech company investments” (can’t resist getting involved in the possibly-questionable data center/AI circular financing deals?), talk of 50 year mortgages (want more house price inflation?), hiring a “consultant” w/zero experience and a not-so-great police record, leaving them in conservatorship (to retain more control I assume…see circular tech financing above). I know, it’s politics.

    Maybe they have too much time on their hands……wish they’d concentrate on “the basics” here.

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    1. Fannie Mae and Freddie Mac’s relationship with the government is one of the three critical issues I discuss in my current post (the others are Treasury’s senior preferred stock and FHFA’s excessive capital requirements) that the administration will need to resolve in order for its sale of a partial stake in the companies to be successful. Bill Pulte is a fierce internal advocate for leaving the companies in conservatorship, with himself as their head, exercising complete control over what they do and how they are managed. Investments in tech companies, the 50-year mortgage (which not only is not eligible for purchase by Fannie and Freddie under Dodd-Frank but also adds greatly to borrowers’ lifetime interest payments and increases lender risk by slowing the buildup of equity, all for the “sugar high” of a modestly lower monthly payment), and the firing of the FHFA inspector general along with Fannie’s internal ethics and compliance team all are Pulte initiatives that I do not believe sit well with potential investors. As I’ve said previously, I am confident that Treasury Secretary Bessent does not support either leaving Fannie and Freddie in conservatorship or having someone with as little mortgage market knowledge and experience as Pulte running them as chairman (which also is illegal under FHEFSSA), and that he has made these positions known to the president. We now will have to wait to see who the president sides with on this issue.

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      1. Hi Tim,I’m sure you’ve heard by now that Fannie Mae shared confidential mortgage info with Freddie Mac. Fannie marketing exec Lauren Smith, the AP has reported, was given a portfolio that “transcended the boundaries dividing Fannie Mae, Freddie Mac and the FHFA.”  

        Smith, directed by Pulte, gave “confidential mortgage pricing data from Fannie Mae to a principal competitor.” When senior execs raised the alarm that doing so could open the company to liability for ostensibly colluding with a rival to fix mortgage rates, they got fired.

        Malloy Evans, Sr. VP of Fannie’s single-family division wrote an email on Oct 11 to the marketing exec titled “As Per Director Pulte’s Ask,” and copied then-CEO Almodovar and others writing, “Lauren, the information that was provided to Freddie Mac in this email is a problem, That is confidential, competitive information.” He went on to write that he wanted to “make sure you do not exacerbate this issue.”

        Evans reportedly asked Danielle McCoy, Fannie Mae’s gen counsel, “to weigh in on what, if any, steps we need to take legally to protect ourselves now.” McCoy, not surprisingly, advised that, the information should “never be shared.”

        The report notes that, while Smith has thus far retained her position with Fannie, the officials, including Evans, Almodovar, and McCoy, who raised concerns are not—they were sent packing along with internal ethics watchdogs who were “investigating Pulte and his allies.”

        Aside from the obvious concerns that having FHFA head lead the boards of directors of both GSEs, I wonder if you have any thoughts about this latest FHFA fiasco.Thanks,dave

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    1. Yes, I did see that. My take on the “dust-up” is that Treasury Secretary Bessent is not happy with FHFA Director Pulte’s incessant calls for Fed Chairman Powell and Fed Governor Lisa Cook to be fired, and that he expressed that unhappiness in no uncertain terms to Pulte at a dinner at the newly inaugurated Executive Club last week. (For what it’s worth, I’m with Bessent on this; undermining the confidence of international investors in the independence of the Federal Reserve is likely to both steepen the yield curve–which won’t be good for mortgage rates in the longer run–and weaken the dollar.)

      I’ve said a number of times that I thought Secretary Bessent would take the lead on how the administration decides to deal with Fannie and Freddie–principally because Treasury has to make the call on what to do with the senior preferred, the liquidation preference and the net worth sweep (which has only been suspended)–and that I thought Pulte would go along with whatever Bessent decides. I still believe the first is true, but I’m now wondering about the second. I doubt that Pulte will be able to convince President Trump to override Bessent’s recommendation on what to do with Treasury’s claims on the companies, but he may decide to dig in his heels on the ERCF, and keep the companies’ capital standards unreasonably high. That would be bad both for guaranty fees (and affordable housing borrowers) and the companies’ stock valuation. Few realize this, but Fannie’s outstanding single-family MBS have been shrinking (by about 1 percent year) since June 30, 2022, and its share of total residential mortgages financed has fallen from 27.7% then to 25.1% now. And Fannie just reported that in the second quarter of this year the share of mortgage-backed securities issued by it (24%) and Freddie (26%) combined fell to 50% from 75% in 2020, before the ERCF was promulgated, with Ginnie Mae (40%) and PLS (10%) shares equalling Fannie and Freddie’s for the first time since before the financial crisis. Pulte does not seem to be aware of the impact Fannie and Freddie’s non-economic capital requirements are having on their competitiveness, as he continues to tout their growth prospects under his leadership, contrary to what’s happening in the market.

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      1. Awfully quiet out there. I guess it’s safe to assume folks may be under some sort of legally-required “quiet period” and/or non-disclosure agreements as this process moves forward w/the underwriters. Of course, there are always plenty of other things going on to divert the attention of the admin such as tariff drama, Argentina, etc.

        I did watch a recent interview w/Willy Walker (Walker and Dunlop – real estate firm) and he mentioned he was going to participate in some sort of round table discussion w/the admin regarding ideas and input on the F&F situation.

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        1. I keep waiting for some signs of how the administration will deal with the three issues that will determine the success of any monetizing of its stakes in Fannie and Freddie–the companies’ future governance (mainly when and how they will be returned to private ownership), the disposition of the government’s claims on them (which exceed their realizable value), and their ultimate required capital (which will determine how much if any new equity they will need, and how they will price their credit guarantees). So far, I’ve not read or heard anything that indicates how any of these issues will be decided.

          Treasury Secretary Bessent has said in a number of interviews that his staff is working on the prerequisites for a successful sale of a partial stake in Fannie and Freddie, and I know Treasury has been having meetings with industry leaders and stakeholders as they do this, which I find encouraging. But between Bessent and FHFA Director Pulte, there will need be a winner as to whose vision for the companies will be endorsed by President Trump. On a factual basis this choice is an obvious one, yet in today’s political world facts don’t necessarily prevail.

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          2. Two of the three proposals FHFA says it is withdrawing apply to the Federal Home Loan Banks. The one that applies to Fannie and Freddie is a 2021 proposed rule that imposed four types of liquidity requirements on the companies–one short-term (30-day), one intermediate-term (365-day) and two long-term–while also calculating required liquidity under the assumption of stressed cash inflows and outflows, and mandating daily reporting on these metrics to FHFA, and monthly disclosures to the public.

            I recall thinking at the time this rule was proposed that it was incredibly conservative and bureaucratic (the notice of proposed rulemaking, or NPR, ran to 87 pages). Its origin stemmed from a contention made at the onset of the financial crisis that attempted to justify Treasury’s takeover of the companies by claiming they were experiencing difficulty rolling over their debt (which was not true). The FHFA NPR cited consultations with the banking regulators in 2009 as a basis for the rule, but neglected to note that since that time the companies had been required by Treasury to drastically reduce the size of their mortgage portfolios, which had given rise to the need for the amount of debt they’d had back then. Today, with their sole business being credit guarantees of residential mortgages (and their mortgage portfolios limited to purposes incidental to that business), Fannie and Freddie have very little liquidity risk. Yet in spite of this fact, the FHFA liquidity NPR, written in 2021, prominently stated that “the proposed rule’s four quantitative minimum liquidity requirements build upon the U.S. banking supervision framework.” Except banks DO have a great deal of liquidity risk; indeed, bank runs were the reason for the trillions of dollars of special liquidity programs created by the Fed at the height of the financial crisis, which effectively saved that industry from collapse. There never has been a reason to impose such liquidity requirements on Fannie and Freddie–not in 2009, and certainly not in 2021.

            So, might FHFA’s “reality-based” decision to withdraw its 2021 NPR for unjustified bank-like liquidity requirements on Fannie and Freddie also suggest the possibility of a similar assessment of its unjustified bank-like capital requirements on Fannie and Freddie imposed by former Director Calabria’s ERCF in 2020? We can hope!

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          3. If you or your readers are interested, I updated my recapitalization and release analysis. It includes the government exercising a portion of their warrants to take a 5.0% ownership position in each company.

            And although there are several reasons I am strongly opposed to the government exercising these warrants, in particular their already unprecedented and extraordinary return on their senior preferred stock, their common-share ownership in the companies could have the effect of resolving the implicit/explicit guarantee issue.

            As before, words that are highlighted in blue are hyperlinks to reference materials. Please let me know if you have any questions.

            Fannie Mae, Freddie Mac, and The Federal Government:
            Restoring America’s Twin Pillars of Large-Scale, Low-Cost Housing Finance with The Explicit Backing of A New Shareholder

            https://drive.google.com/file/d/1Q2nILGo0oJFt6VxZgB7yiTbkFwkiWOf7/view?usp=sharing

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      2. Tim–You may have seen President Trump’s post on Truth Social of the companies’ $1 trillion. We have seen these numbers as $300 billion, $500 billion, etc. What exactly they may mean? Market cap? Of just Fannie or both? What pps would that translate to? I know it would require lot of assumptions but better than rumour mill. Thank you.

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        1. The Truth Social post I saw yesterday had the value of Fannie and Freddie combined pegged at $1.0 trillion.

          This is an unrealistically high number, and it’s a little disconcerting to see it in print in a post from the president, who will have the last word on any sale of a partial stake of the administration’s ownership in the companies. The most optimistic spin I can put on it is that the president (or someone on his staff) got this post from Bill Pulte—who in my view has at best a rudimentary grasp of the economics of the companies’ business and finances—and didn’t question it before he put it up.

          There are easy reference points for assessing the realism of the projected market capitalization for any company. The simplest is the trailing 4-quarter earnings of that company (either in the aggregate or on a per-share basis) times a price/earnings ratio. Fannie and Freddie’s combined trailing 4-quarter earnings are $25.3 billion, so a market cap of $1.0 trillion would require a P/E of 39.5:1. The P/E of the Standard and Poor’s 500 currently is 27.5:1, and the highest Fannie Mae’s P/E ever got was 85% of the S&P 500, which today would be 23.4:1. But as I noted in my current post, the treatment of Fannie and Freddie’s shareholders by the government over the last 17 years undoubtedly puts a much lower ceiling than 85% on their P/E relative to the S&P 500, at least in the near term. A relative P/E of 50% would put the combined market value of Fannie and Freddie at around $350 billion.

          To then derive a projected price per share for either company, one would need an estimate of the number of common shares of stock outstanding. We know how many common shares each company has outstanding today (they publish that every quarter) as well as how many shares of common Treasury is entitled to because of its warrants. What we don’t know, though, is how many additional shares might need to be issued to reach adequate capitalization; that will depend on whether FHFA stays with its unjustifiably conservative capital requirements of the ERCF, or (wisely) reverts to the 2.5% minimum of its 2018 capital standard. The latter, at a 50% relative P/E ratio, would result in an average Fannie/Freddie stock price of close to $40 per share.

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          1. Tim, You must have seen the tweet from Bill Pulte on risks, after he tweeted the above. It is specific to Fannie Mae. What is your take on it? Looks like they will do an IPO on Fannie Mae first (no merger). Secondly, is it a disclosure from Chair of Board as they expect an onslaught of buyers after the $1T tweet, and a sane thing to do?

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          2. I did see the Pulte tweet (in which he wrote: “IMPORTANT FOR ANYONE INTERESTED IN Fannie Mae. Please read the full risk sections that Fannie Mae has listed in their 10K,” and then gave a link to the beginning of those sections).

            I won’t speculate on why Pulte called attention to these sections. While it may be related to a future sale of a portion of Treasury’s stake in the company (which first must be converted into a form that can be sold), Pulte’s tweet is not a substitute for a disclosure of these risk factors that will be made by Fannie’s investment banks in the offering prospectus prior to the sale. It’s just something Pulte elected to do on his own.

            And I would add that the institutional investors who would be the principal buyers of the Fannie common sold by Treasury almost certainly will be familiar with the substance of the risk disclosures in the company’s 2024 10K. That 24-page “list of horribles” is little different from the 22-page list Fannie published in 2020 (and each year since). Indeed, the company began to make extensive disclosures of its theoretical risks immediately after it was put in conservatorship, in its 2008 10K (that list also ran to 22 pages). So, nothing in the most recent 10K risk sections that Pulte linked should come as a surprise to an investor who has been following Fannie for any length of time.

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      3. FHFA is seeking input on its strategic plan. I would like you to write one advocating for canceling the SPSA, the warrants and the return of $30 billion in excess they took even after a whopping 10% return. Would you?

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        1. Bryndon—No. I am weighing whether to respond to FHFA’s request for public input on its new strategic plan, but if I do respond I will not recommend canceling the warrants and returning the overpayment (which I believe is less than $30 billion) on a ten percent return against the senior preferred stock that would have been outstanding had the net worth sweep remittances in excess of that amount instead been used to pay down the principal of the seniors. I’ve stated my view on this topic multiple times. I believe the only practical outcome for Fannie and Freddie that strikes the right balance between the interests of existing investors, homebuyers, and the administration is the one I outline in my current post, and that involves Treasury exercising its warrants for 79.9 percent of the companies’ common stock but also deeming the seniors to have been repaid (as they have been), and for FHFA to suspend the risk-based component of the ERCF and revert to the 2.5 percent minimum capital requirement in its 2018 standard. It would be a different matter if warrants did not exist, but, unfortunately, they do.

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          2. Bryndon F.–That is correct; it was a different Bryndon who asked that question.

            When I answered it, though, I hadn’t read the “Strategic Plan: Fiscal 2026-2030” put out by “U.S. Federal Housing” (Bill Pulte’s name for the Federal Housing Finance Agency he heads)–I’d only read that interested parties were being asked to comment on it. I’ve now read this plan, and it says nothing about preparing to remove Fannie and Freddie from conservatorship, but instead it includes, as Objective 1.3, “Manage the conservatorships on behalf of the American people.” This, to me, is another strong indication that Pulte is making the argument to President Trump that the companies should remain in conservatorship throughout the tenure of his presidency. I am confident that Treasury Secretary Bessent does not agree with that advice–it would greatly reduce the proceeds from any partial sale of Treasury’s stake in the companies–and I hope it is Bessent’s view here that prevails.

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      4. Hi Tim,

        What do you think of Dir. Pulte’s tweet: “Tomorrow is Fannie Mae’s Earnings. To make Fannie Mae even stronger and to advance us forward from Earnings, I am pleased to announce that Fannie Mae and Housing Legend, the 21-year Veteran and former President, David Benson, will be REJOINING the Company as Senior Advisor.”?

        Do you know David Benson? Do you think he’s a good choice for the role? And would you consider returning to the company in any position? (Your old friend Chris Whelan replied to Pulte that there’s plenty of good people with lots of management experience in the industry currently. Not that he was referring to you…but your expertise would certainly be a boon to the industry and Fannie, or Freddie.)

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        1. Dave: Yes, I do know Dave Benson. He joined Fannie from Merrill Lynch as Vice President and Assistant Treasurer in 2002–when I still was its CFO–and after I left he took on positions as Senior then Executive Vice President on the finance side of the company, and became Fannie’s President in 2018. I have always thought very highly of Dave (although I’ll admit, I never thought of him as a “Housing Legend”…), and he was one of the few executives at the company I stayed in touch with until he left last year. I’m glad to hear he will be back as a Senior Advisor; they certainly can use his institutional expertise and experience.

          But no, I have no intention of rejoining Fannie Mae in any capacity post-conservatorship.

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  4. Given your CFO tenure at FNMA, what is your view on non-cumulative perpetual preferred stock in firm’s capital structure? In particular, amount on percentage basis and perspective of rating agencies versus common equity. Thank you.

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    1. The 1992 capital legislation that created FHFA’s predecessor agency, the Office of Federal Housing Oversight, or OFHEO–the Federal Housing Enterprises Financial Safety and Soundness Act (FHEFSSA)–defined core capital for Fannie and Freddie as “the sum of…(a) the par or stated value of outstanding common stock, (b) the par or stated value of outstanding perpetual, noncumulative preferred stock, (c) paid-in capital, and (d) retained earnings.” As a consequence, the only form of junior preferred stock the companies can issue that counts towards their regulatory capital requirement is non-cumulative.

      I was the first CFO at Fannie to issue preferred stock, and when we were doing it we had a policy of keeping the amount of our preferred at between 10 and 15 percent of our total capital. At the time (1990-2004), that was a fairly typical percentage for financial institutions, and the credit ratings agencies raised no concerns about it. Of course, this may have changed since then.

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      1. Tim,

        POTUS seems to be suggesting merging Fannie & Freddie into “The Great American Mortgage Corporation.”  Thoughts?

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        1. There have long been discussions about the pros and cons of merging Fannie and Freddie. The main argument in favor of it is that the resulting economies of scale would reduce administrative expenses; the main counterargument is that having two entities with the same charter encourages them to compete with one another for market share, spurring innovation and keeping guaranty fees down. (The pro-merger argument that having two entities resulted in a “race to the bottom” on credit quality that caused the financial crisis finds no support in the factual record.)

          Merging Fannie and Freddie probably would enable them to reduce their average guaranty fees by 2 or 3 basis points. But to put this in perspective, I would note that this is less than one-third of the 10 basis-point “tax” Congress levied on the two companies with the Temporary Payroll Tax Cut Continuation Act of 2011 (or TCCA)–which was renewed by Congress in 2021, with full support of the mortgage industry–and an even smaller fraction of the extent to which guaranty fees are being pushed up by the unjustifiably high capital requirements of the ERCF and by the enormous costs of the non-economic CRTs that FHFA gives them an incentive to issue by reducing their already much-too-high capital requirements when they do so. The administration’s (and the Financial Establishment’s) emphasis only on Fannie and Freddie’s administrative expenses as sources of benefit to consumers–while ignoring the costs of the TCCA, the ERCF and CRTs that they implicitly or explicitly are supporting–suggests they’re not as focused as they could (or should) be on the benefits Fannie and Freddie could be providing to consumers if they were properly structured, capitalized, released from conservatorship and privately run.

          On the merger issue itself, the big question to me is “does the administration have the authority to do this”? If the companies were shareholder-owned and run, their boards could agree to a merger. But today not only are they being run in conservatorship, but the chairman of both companies is the Director of FHFA, contrary to the “black letter” language in their 1992 capital legislation that states, “The Director and each of the Deputy Directors may… not hold any office, position, or employment in any regulated entity or entity-affiliated party.” Moreover, the FHFA Director, Bill Pulte, also has appointed a majority of both companies’ boards of directors. Under these circumstances, it’s not clear how a merger between Fannie and Freddie would pass legal muster (with any shareholder of either company having standing to sue to block it).

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        1. It is revealing that FHFA released the results of the 2025 Dodd-Frank stress tests of Fannie Mae and Freddie Mac on the last day (August 15) permitted by its regulatory statute, HERA, and that it did so without a press release trumpeting the excellent news that the two companies once again had passed a stress test designed to replicate the environment of the Great Financial crisis (in the 2025 Dodd-Frank test, a 33 percent drop in residential home prices) without the need for ANY initial capital–in fact, they recorded pre-tax net income of $5.1 billon and $5.8 billion, respectively, even under these conditions. For a safety and soundness regulator, this should have been a cause for celebration.

          But I think we all know why FHFA does not publicize the results of these Dodd-Frank stress tests: the last half-dozen of them have been continual (and, for FHFA, unwelcome) reminders that the capital requirements of former Director Mark Calabria’s 2020 Enterprise Regulatory Capital Framework (ERCF) are not based at all on the risk of the companies business–as was required by HERA–but instead are the mathematical result of a preposterous assemblage of conservative assumptions, cushions, buffers, minimums and add-ons intended to push (and succeeding in pushing) the companies’ required capital to “bank-like” levels, despite the fact that Fannie and Freddie are not banks, and have no business in common with banks.

          This stark contrast between financial reality (as reflected in the results of the stress tests) and FHFA fiction has become a point of focus as the Trump administration is publicly discussing the recapitalization of Fannie and Freddie. Investors in the companies know there is no economic reason for them to hold capital anywhere near the 4.34% of total assets currently required by the ERCF; even the pre-Calabria minimum capital percentage of 2.5% arguably is too conservative, and unnecessarily burdensome to first-time homebuyers who use Fannie and Freddie financing. Therefore, for the current administration to be successful, and to be perceived as being successful, in its stewardship of Fannie and Freddie, somebody in it–most likely Treasury Secretary Scott Bessent–must convince current FHFA Director Bill Pulte that to not deal with the hopelessly flawed ERCF before setting a recapitalization goal for Fannie and Freddie would be an inexcusable “unforced error,” dooming that recapitalization effort to failure.

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      1. The comments by Bessent, along with the proposed reduction in banks’ required capital for their mortgage holdings, are positives because they properly put a focus on aligning mortgage capital requirements with risk. But I’m not thrilled about the continued comparisons between the mortgage capital requirements of banks and Fannie and Freddie, for two reasons. First, as I’ve often remarked, Fannie and Freddie literally have no business in common with commercial banks. And second, banks’ Basel III capital requirements are tailored to multinational entities that take many types of risk–including interest rate and liquidity risk–on a multitude of different product types, and therefore must of necessity employ a “rough justice” approach to their applicable capital ratios. Fannie and Freddie take only one significant risk (credit) on a single product type (residential mortgages), for which a vast amount of predictive data exists. And indeed, the Housing and Economic Recovery Act (HERA) of 2008 that created FHFA specifically states that its “Director shall, by regulation, establish risk-based capital requirements for the enterprises.” HERA mentions neither banks’ required capital nor Basel III; those were introduced by former director Calabria, in spite of the fact that they are not risk-based in any meaningful sense–they’re ratio-based–and Calabria also was the one who chose to override HERA’s “risk-based” directive by putting so many add-ons, buffers, cushions and minimums in the risk-based component of his ERCF to make it exceed the bank-like 4.0 percent minimum of the ERCF he insisted upon. I hope Secretary Bessent understands that to make Fannie and Freddie efficient credit guarantors again–to homebuyers’ advantage, and also Treasury’s–he has to undo the damage done by Calabria by telling FHFA Director Pulte to have his staff follow HERA and create an honest risk-based capital standard for the companies.

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  7. Tim, thanks for yet another enlightening article.

    Do you think keeping government share under 80% will have any role to play in the decision of whether to convert the Senior Preferred Stock into common? I understand that the 79.9% for the warrants was deliberately chosen to avoid consolidating GSEs assets and liabilities into the federal balance sheet.

    Marcelo

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    1. I don’t know how the people at Treasury are thinking about this. I’d read in a number of places that avoiding consolidation was the reason for Paulson’s people picking 79.9% as the amount of common stock warrants in the companies Treasury granted itself, but I’ve also read that advocates for Treasury converting the senior preferred believe there are ways to get around the consolidation requirement (although I’ve never seen a convincing legal argument for that). Still, as I note in the post, I don’t this should come down to a call on consolidation; allowing the seniors to be deemed to be repaid is Treasury’s best economic choice if it wants to maximize the value of its current stakes in Fannie and Freddie.

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  8. Tim, what do you think may be in those 10,000 documents that Rolling Stone mentions ? It appears Director Pulte will get to them. Based on sentiments , it appears they will expose the fraud and would call for reversal of everything and taking heat off for eliminating warrants , PSPA etc. Any thoughts ?

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    1. I suspect these are the documents that were produced in discovery in 2014 and 2015 in the case of Fairholme Funds v. the United States, in the Court of Federal Claims. The judge in this case, Margaret Sweeney, made some of these documents public in 2017, but the rest have remained under seal. If my supposition is correct, I expect most of the unreleased documents will have to do with the background on the imposition of the net worth sweep in August of 2012. The documents Sweeney released made clear that Treasury was not being truthful in its public rationale for the net worth sweep–which was that it imposed the sweep to prevent a “death spiral” of borrowing by the companies to pay their senior preferred stock dividends–but instead knew that an avalanche of the non-cash expenses FHFA put on Fannie and Freddie’s books between 2008 and 2011 were about to reverse and become income, and then capital, which Treasury wanted to prevent. While anyone paying attention at the time knows this, most people in the mid-teens were NOT paying attention, and the media declined to cover the story. Having a huge amount of these documents come out now would be awkward for Treasury, and make it difficult for it to take a hard line on the treatment of Fannie and Freddie’s senior preferred.

      It’s possible that there could be some “smoking gun” documents here, but I don’r expect any. Nor do I think there will be anything in these documents that challenge any decisions the government made in 2008 regarding the warrants or the Senior Preferred Stock Agreements. That time period, and those actions, were outside the scope of the legal claims made in Fairholme Funds v. the U.S., and thus there would have been no discovery of documents that might have been related to them.

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  9. Tim – How does your analysis translate to investor owned preferred shares (aka, Junior Preferreds or JPS – I believe)—eg, FNMAS, FMCKJ, etc.? What are likely scenarios for how they will be treated/resolved within the framework of your analysis?

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    1. The resolution scenario I propose in the current post would be very favorable to the holders of Fannie and Freddie junior preferred stock, because in order to maximize the value of the common shares Treasury holds (through conversion of the warrants) the companies would have to begin paying–or at least have a clear and credible plan to begin paying–dividends on that common. But they can’t pay dividends on the common without first resolving the payment status of the junior preferred. How the companies might do that–and whether this will be decided by them or Treasury–I don’t have a strong view on.

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  10. Thank you for the post, Tim.

    If there was an agreement between FHFA and UST to deem the senior prefs repaid but in return amend the warrants up to 83% of the common instead of 79.9%, what effect do you think it would have on the future P/E ratio compared to the solution you propose?

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    1. Midas–I don’t think the scenario you’re postulating is a plausible one. The reason Treasury would elect to retroactively grant Fannie and Freddie permission to repay their senior preferred stock with the excess payments (over a 10 percent dividend rate) made on the prior prior quarter’s balance is that it (finally) understood that doing so was the best way to maximize the value of the stakes it holds in the companies. Given that understanding, it would be irrational for Treasury to then “call in an airstrike on itself” by attempting to amend the terms of the warrant conversion (only modestly) in its favor.

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      1. The purpose of the increase in the warrants’ percentage would be to give UST something to “sell” to the people who would find a pure senior pref writedown, which is what “deeming the senior prefs repaid” amounts to, politically toxic (according to Calabria’s book).

        It would also allow UST to end up with more money in the end; an extra 3% for UST wouldn’t cause the P/E to fall off a cliff.

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        1. I would advise Treasury to not call the action it will be taking with the senior preferred a “write-down,” because it isn’t. Treasury is retroactively allowing the companies to repay the senior preferred (that investors know they never needed). No financial regulator anywhere or at any time ever has used non-repayable senior preferred stock to “rescue” a company in trouble. Treasury did it in 2008 because its intent back then was to keep Fannie and Freddie in conservatorship indefinitely (which is why, following the blueprint given in the March 2008 document “Fannie Mae Insolvency and its Consequences,” circulated within Treasury at that time, it had FHFA put as many non-cash expenses on the companies’ income statements as it possibly could justify, at the same time as the banks were doing the opposite, through the use of what was openly called “extend and pretend” accounting), with the intent of “winding down and replacing” them legislatively. Treasury now knows this will not work, and that the companies need to brought out of conservatorship.

          Importantly, Treasury doesn’t need to admit it that its past approach to the companies was a mistake; it just has to say that what it’s doing now is the best way to maximize the value to taxpayers of its stakes in them (which it should be able to to do convincingly, because it’s true). Giving itself another three percent stake in them would muddle the message it’s trying to send, for no good reason. I know you may disagree, and that’s fine.

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  11. Tim great read as always. With so many common people owning the commons and Pulte’s multiple mentions of “do no harm” I feel like the gov approach will be similar to your thinking.

    I do wonder how they would approach their holding/offloading of 80% of the company whether it be SWF or golden share (which I need to read more about).

    As the news and gov statements continue to pile in these days, please keep up the blog posts, they are very helpful.

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  12. Tim,

    Well written as usual.

    You have done ‘God’s work’ with your Blog,. Thank you.

    The Commons in F2 have skyrocketed from 35-cents two years ago to $9-$12, & have ‘settled’ marginally lower. That is a meaningful move from the multi-year bottom, & in this environment should not be taken for granted, or treated lightly.

    Currently:

    1.308B Common shrs FNMA @ $9.50 = $12.4B

    650M Common shrs FMCC @ $8.25 =$5.4B

    Can the Commons have a chance given the current political environment to meaningfully meet or even head North of Ackman’s rosy $30-ish price target? Or is much of the ‘good news’ potentially priced in IYO?

    Specifically, what is your view on Matthew Halbower’s comments (F2 recorded on USG’s Balance Sheet, political reality, et al)?

    https://www.cnbc.com/video/2025/06/26/matthew-halbower-absolutely-believe-government-will-privatize-fannie-and-freddie.html

    TIA

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    1. I did see Halbower’s interview the other day. His concern about owning Fannie and Freddie common is what he believes is a likelihood that the Treasury senior preferred WILL be converted to common, diluting and lowering the value of the common shares. The reason he gives is that (he says) the senior preferred is on the Treasury balance sheet at a value of “several hundred billion dollars,” and because of that Treasury can’t just “rip it up,” so he thinks it will convert the seniors to common.

      When I heard that I had a few reactions (which haven’t changed). I haven’t seen the Treasury balance sheet Halbower is referring to, but I wonder if the value that’s on it is just for the senior preferred, or if it’s somebody’s estimate of the value of ALL of Treasury’s claims on the companies–the senior preferred, the warrants, and the additional liquidation preference. A reason I think it might be the latter is that we know the exact value of the senior preferred–it’s $193.4 billion, not “several hundred billion.” The several hundred billion figure I’ve heard mentioned is for Treasury’s combined claims on both companies. You wouldn’t think that Treasury’s balance sheet would omit the value of the converted warrants, or the additional liquidation preference–but if it does, that would be wrong.

      And that brings me back to the point I make in my post. I don’t think anyone serious is suggesting “ripping up” the Treasury senior preferred. What I’VE suggested is that Treasury retroactively cancel the non-repayment provision of the seniors, then apply the payments made through the net worth sweep in excess of 10% of their outstanding balance to pay down their principal. That’s different–and what it does is make Treasury’s warrants for 79.9 percent of the companies’ common stock much more valuable. I think if Halbower understood that, he’d have a different view about the commons. And I doubt that he’d advocate for Treasury to let a bad accounting choice drive a worse economic decision about what it should do to maximize its value of its stakes in Fannie and Freddie.

      On the potential value of the commons–and I’ll do this for Fannie and Freddie combined–under the assumptions I make in my post they would be splitting $29 billion in combined sustainable earnings among the current total of fully diluted shares outstanding (including the exercised warrants and convertible debt proceeds, but no additional dilution from new issues of equity) of 9.127 billion, so that would produce an average EPS of $3.18. And if the companies can get to a multiple of 50 percent of the current 27:1 trailing P/E for the S&P 500, that would be 13.5:1, and make their calculated share price $42.90. (That’s not a prediction, mind you.) A $30 share price implies about a 35 percent relative P/E.

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        1. Hank–Thank you, this link clears up what’s on Treasury’s balance sheet.

          The “Fannie Mae senior preferred stock” figure on Treasury’s balance sheet for September 30, 2024 is $207.8 billion (gross), which is very close to what Fannie shows as its combined senior preferred stock outstanding ($120.8 billion) and additional liquidation preference ($87.2 billion) as of that same date, totaling $208.0 billion. (I’m not sure why Treasury’s number is $200 million lower). But Treasury then shows a $43.7 billion “Cumulative valuation loss” on that liquidation preference, reducing it to a fair value of $164.1 billion. Treasury next shows a gross value for Freddie’s senior preferred and liquidation preference of $125.7 billion, which it has written UP by $8.1 billion, to produce a fair value of $133.8 billion as of September 30, 2024. Finally, the balance sheet gives a September 30, 2024 gross value of $5.4 billion for its warrants for 79.9 percent of BOTH companies’ common stock, which it has written up by $2.5 billion, to reach a fair value of $7.9 billion.

          So, this shows how Treasury has been thinking about its claims on Fannie and Freddie. According to the accountants, all of the value is in the senior preferred and liquidation preference, and none is in the warrants. But I wonder if anyone ever has asked those accountants, “How do you propose to monetize the value you assign to that senior preferred and liquidation preference?” I doubt it, because if they thought about it in any depth they would realize what I’ve been saying for some time: the very act of converting the seniors into common–which they have to do to monetize it–will cause the existing holders of that common to lower the price for ALL of the shares Treasury has by enough to make their aggregate value (much) less than Treasury could have realized from just exercising its warrants for nearly 80 percent of the companies’ shares (which everyone has been assuming for some time that they will do), and selling those.

          I will be VERY surprised if the senior Treasury people haven’t figured this out by the time it comes to get a deal done.

          Oh, and the answer to your question about “the big jump from $240.4 B in 2023 to $305.8 B in 2024” is twofold– the gross values of the liquidation preferences rose by the amounts of Fannie and Freddie’s annual earnings, and Treasury reduced the write-downs they had on those gross values between the two statement dates (for reasons I didn’t find in their writeup, although I only scanned it).

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  13. Tim

    Excellent post, thanks.

    There seems to me to be a tension among institutional investors regarding continuing strong FHFA control over the GSE boards of directors (whether by consent decree or new PSPA amendment), with equity investors likely opposed and MBS investors likely in favor. Do you agree? Perhaps we will see a staging process, with some ongoing board control for a short time to settle the MBS market, and then a lapse of control to satisfy the equity market.

    I think the S&P 500 is too diverse to provide much relevance to estimate GSEs’ future PE range. Given that most money center banks and large property/casualty insurance companies are SIFIs, I would look to their PE ranges for analogies (and Ackman specifically focuses on large PI insurance companies). The current average forward price-to-earnings (P/E) ratio for money center banks is about 14, and for large PI insurance companies about 15.

    The equity market will drill down on many metrics of the GSEs cash flows, and I think look to these PEs for large financial institutions as some form of guidance (though I note that at a PE of 15, this would imply 55% of the S&P500 PE, which would compare to your historical experience). But as to the existence of an ongoing generic GSE PE discount, I wonder whether the long period of GSE political antagonism (and its negative effect on investor valuation), as you cite beginning well before conservatorship, will attenuate at least somewhat from and after conservatorship release.

    It may be wishful thinking, but I see GSE political antagonism wearing down after conservatorship release (assuming the equity and investor markets’ reception is satisfactory). We have transitioned from stages advocating “GSE death”, to “GSE permanent conservatorship”, to “no windfalls for billionaires”. Once recap/release is accomplished, much of the sources of headwinds may well look to blow elsewhere.

    ROLG

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    1. ROLG– I wasn’t using the S&P 500 to estimate Fannie and Freddie’s future P/Es, I was using Fannie’s P/E relative to the S&P 500, which I happen to have data on. And I was surprised to be reminded that it told such a clear story–the relative P/E trending upwards during the decade of the 90s, as Fannie established a strong record of performance and consistent double-digit earnings growth–then getting whacked shortly after FM Watch was formed, and trending downward for the next four years as investors in Fannie became more and more concerned that its misinformation campaign and lobbying might ultimately negatively affect Fannie’s business. And as I say in the piece, I think there are some lessons to be learned from the sensitivity of Fannie’s stock price to political and regulatory risks.

      By the way, I would not have this relative P/E data had it not been for the litigation against Fannie (and me personally) over the charges of accounting fraud made by FHFA’s predecessor agency, OFHEO. That litigation resulted in the production of a host of source materials, among them many of the financial presentations I’d made to the investor community. I still have a number of briefing books produced by my lawyers that contain some of these materials, one which is the relative P/E chart I referenced (along with the results of the survey of investors’ major concerns, which I’d forgotten we’d done).

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  14. Tim,

    Has anyone within the current administration reached out to you for your input recently? Not asking who or any specifics which of course you would not provide or break confidence.

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    1. Eric–I don’t want to comment on that version of the question, either. What I will say, though, is that for the nearly ten years I’ve been writing this blog my policy has been to not reach out myself to policymakers or principals, since I don’t represent any constituency. What I attempt to do instead is provide facts, and fact-based analysis, to stakeholders who do have constituencies (or significant “stakes in the game”)–many of whom I do know personally–but let them be the ones to initiate the direct contact with policymakers, and do the advocacy work.

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  16. RE PE ratio. The duopoly are unique. Hard to fine a comparable. AmEx is the closest in pure credit insurance. Its PE = 20. So I think eventual PE of GSEs should be around 25.

    In case of FNMA, net income = $15B, value = $375B. Gov stake (80%) = $300B.

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    1. If gov keeps 80% of commons in the sovereign wealth fund, limited float volume available to satisfy many S&P 500 tracking funds and ETFs. Price can go much higher.

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      1. The point of my post is that, whatever anyone’s opinion is of the theoretical P/E of Fannie (or Freddie), it won’t get there by itself; it will depend heavily on how Treasury deals with the specific issues I discuss.

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  17. Tim, thanks for the important insights into what this administration must do by acknowledging & following the facts about Fannie and Freddie if/when they release them — which I believe they will.

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