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.