In recent weeks, the second Trump administration (Trump II) appears to have done a complete U-turn on what it plans to do with Fannie Mae and Freddie Mae (F&F), the two large government-sponsored enterprises (GSEs) that have been under government control via conservatorship for 17 years now. Gone is its initial approach, which involved a careful and orderly process, acknowledged to be quite complex, for determining the right policies and actions to take, being careful to not disrupt the country’s mortgage markets, which the two companies dominate.[1] Instead, Trump II – based on comments and postings by various government officials, including President Trump himself – has now set a goal to go full-steam ahead and conduct a giant IPO-like[2] stock sale by year’s end.
But not so fast. My research indicates that the people seemingly most knowledgeable[3] about F&F, all former insiders at the companies; the Federal Housing Finance Agency (FHFA), the regulator and conservator of F&F; and Treasury, overwhelmingly believe this new goal is simply not feasible. And I fully agree with them. (Interestingly, as this article was being finalized, Treasury Secretary Bessent indicated that the IPO effort, while continuing to be an administration priority, might take longer to accomplish. He was not definitive in his comments but was perceived to be laying the groundwork for a delay past year’s end.)
This new direction for administration policy about the GSEs raises three questions that this article is designed to answer. First, why do the most expert people believe a large IPO transaction is not possible by year’s end? Second, what approach to a GSE IPO is currently being pursued by Trump II? And third, what creative alternatives to a large IPO by year’s end might be done instead so that Trump II can still claim a policy victory?
Why do the most expert people believe a large IPO transaction is not possible by year’s end?
To begin with, the $30 billion IPO amount mentioned in the media is roughly equal to the largest IPO ever done, and rumor has it that President Trump wants it to be the largest ever. Whether such a sum is even practical by year’s end is best understood by looking through the eyes of the potential investors, particularly the long-term ones, which will need to heavily participate in the transaction to reach the $30 billion goal. Beyond all the standard questions these investors will have concerning profits, growth, margins, and return on equity, there will be some decidedly unusual or non-standard questions; after all, F&F are not just GSEs,[4] which is already rare, but they are also under conservatorship, rendering the whole situation completely unprecedented.
The following four non-standard conditions are examples of why a large IPO cannot happen soon.
- The large regulatory capital deficiency delays and undermines shareholder control. The FHFA’s required minimum capital for F&F reflects what the FHFA calls the Enterprise Regulatory Capital Framework (ERCF), implemented in 2020.[5] As of mid-year 2025, F&F had a net worth of $166 billion, built up since mid-2019 through retained earnings. Regardless, according to the ERCF, the two companies, as of mid-2025, still had a capital deficiency of an unexpectedly large $375 billion.[6] This shortfall is so large that a $30 billion IPO would only reduce the deficiency by less than 10 percent. It would take many years of ongoing retained earnings, as well as possibly some additional share sales, to fully meet such a capital requirement. Even if the government were to convert its preferred shares to common, for which there is precedent,[7] the deficit would still be about half of the $375 billion. This remaining deficit would still take years to eliminate.
As a result, conservatorship will likely continue for many years as it is designed to be ended only when the “conserved companies” – in this case, F&F – are fully capitalized. This means that the FHFA will maintain sole authority over F&F during this time, leaving their shareholders totally disenfranchised.[8] Such a lack of shareholder control would seem to be a poison pill to long-term investors. Adding in that the FHFA will be led by a series of politically appointed individuals, beholden to the presidential administration in place at the time and without any fiduciary duty to operate the companies on behalf of the shareholders, it is a poison pill for sure. This effectively eliminates the possibility of an IPO anytime soon.[9]
- F&F’s profits after conservatorship ends cannot yet be forecast. In the years after F&F were placed into conservatorship, a consensus developed in the housing finance policy community that, if and when F&F were to exit conservatorship, changes in their business models would be necessary to ensure they did not repeat their “sins of the past,” i.e., problematic behavior and actions which primarily came from F&F exploiting loopholes in their original charters. Such changes could materially impact future earnings and thus need to be decided on and known about before an IPO in order for investors to forecast earnings as part of their process of valuing the shares.
The three possible business model changes that could most impact earnings are:
- Will government support for F&F’s creditworthiness, historically free, have a cost going forward?[10] There was a strong consensus during Trump I – and not just within the administration, but broadly across the political spectrum – that the taxpayer should receive some payment for its support of GSE creditworthiness, and the Treasury’s “Housing Reform Plan” issued in 2019 called for such a payment. However, no government official has ever specified how large such a payment would be or how it would be calculated. Potentially, it could significantly reduce earnings.[11]
- Who will set F&F’s guarantee fees (G-fees) in the future? Will the two companies do so, acting as they judge best? Or will the FHFA, even after conservatorship ends, set G-fees much like a state-level public utility regulator, which many housing policy people have called for? If the latter, no legislation requires that F&F earn a “fair return” – a term used in legislation at the state level to ensure utility regulators do not set rates too low. This means that neither the current nor future administrations are obligated to avoid underpricing G-fees for political advantage, leaving shareholders with inadequate returns.
- Will current tight limits on F&F’s mortgage investment portfolios be relaxed? Prior to conservatorship, these portfolios, to generate income, had grown to almost $1.6 trillion, double the size of the Federal Reserve’s balance sheet at the time, and were estimated to generate about half of F&F’s earnings. These profits, however, did not reflect investing prowess, but the abuse of GSE access to implied-guaranteed funding, which carries below-market cost.[12] It was a great example of a weakness in their charters, as such investments were allowed in unlimited amounts. Both the George W. Bush and Barack Obama administrations wanted these portfolios to be capped as low as possible, and they are now down by over seven-eighths, at under $100 billion each for F&F. If these tight limits are relaxed, earnings could go up, although it would represent another policy U-turn that would likely be heavily criticized.
Trump II will have to work through such GSE reform-centric business model changes before anyone can determine the future earnings power of F&F, which is, of course, a necessary precedent to valuing their stock price. The politics around each business model change are significant, as different groups important to the Trump II administration hold differing opinions, which means reaching a resolution may take considerable time.
It is worth noting that Trump I and all other efforts to develop a GSE conservatorship exit proposed that such business model issues be addressed first, as their impact must be known as an input to planning the recapitalization of F&F. Trump II’s U-turn reversed this order, establishing the ending – i.e., a giant IPO – first. Administration officials will now have to go back and complete the missing steps of examining the business model. This process is apparently now getting underway, with those officials seeking to do all the necessary work in a very compressed timeframe, including talking to many relevant housing interest groups in Washington, D.C.[13]
3. The FHFA’s current required minimum capital rule, long criticized as being too high,[14] could be legitimately reduced. Any change in the capital required by FHFA for F&F – which currently is $333 billion – will be highly controversial, but the evidence is pretty strong at this point that the ERCF is simply out of line with the real risks run by F&F.[15] I note that the FHFA could relatively easily try to shift and adopt the FHFA minimum capital proposal of 2018, which was never completed, and which today would require roughly $250 billion of capital. This is still a large number, but one that is perhaps a good “Goldilocks” level, i.e., neither punitive (which the ERCF appears to be) nor lax (which was definitely the case pre-conservatorship). In any case, changing a regulatory capital requirement is time-consuming, as it has to follow the procedures of the Administrative Procedures Act (APA). In my experience, this would take a minimum of six to nine months.[16]
4. Resolving other F&F capital structure issues could be time-consuming and politically challenging. First, the current amount outstanding of the senior preferred shares under the PSPA is $361 billion, of which nearly half, or $193 billion, was used to bail the companies out in the early years of conservatorship.[17] Prominent holders of F&F’s equity securities have long advocated that these senior preferred shares should be considered repaid and thus cancelled because of the substantial dividends the government has received on those preferred shares over the years.[18] However, during Trump I, this was considered a political non-starter that was especially poorly received in Congress, where many viewed it as a taxpayer handout to Wall Street.
Alternatively, as was discussed above, the senior preferred stock can be converted to common stock, as was done in the case of AIG,[19] which is the only precedent for F&F’s current situation. Trump II has to decide on this issue before any IPO could practically proceed. In either case, the common equity of the two GSEs, now listed as negative $60 billion, would increase by $193 billion and become a positive $133 billion.
Second, there are preferred shares that predate conservatorship owned by the public with a face value of $33 billion. During Trump I, Treasury discussed the possibility of negotiating with the owners of those preferred shares. Treasury aimed to obtain a discount upon conservatorship exit to prevent those investors from getting a large windfall, as the value of the public preferred shares would otherwise rebound towards par value in an exit. Any such negotiations have yet to occur, and if they were to happen, they would likely be time-consuming.
Considering all the factors involved, completing a large IPO by year’s end certainly looks like a non-starter. It would likely take considerably longer and would require Trump II to make tough decisions, take political heat for them, and require large amounts of time from senior administration officials who have other issues with which to deal. Even getting it done in 2026 might not be feasible due to the capital deficiency of the two companies, which could easily prolong the disenfranchisement of shareholders for several more years afterwards.
What approach to a GSE IPO is being pursued by Trump II?
The conventional approach for an administration to address a complex issue like the future of F&F is to follow a formal policy process. This involves consulting all relevant voices within the administration as well as key politically important outside voices. After gathering input from the various parties – including making the policy and political compromises that are inevitable – the administration then integrates the feedback and, once the process is complete, announces the results. This was the process followed during Trump I, starting with a presidential executive order in March 2019, which led to the Treasury’s Housing Reform Plan document released six months later.[20] Early during Trump II, this also seemed to be the process that would be followed. Properly putting the horse before the cart in this fashion would have addressed all the business model issues first, followed by capital issues,[21] and then determining how to fund any capital shortfalls.
Instead, President Trump has decided that he would like a big IPO to be done quickly.[22] If executed at a good share price, this would not just produce profits from the shares sold, but it would also potentially lead to a big gain for the government budget on its much larger total ownership position via Treasury in F&F. This could help reduce the deficit, or even seed a sovereign wealth fund, as Treasury would be able to write up the value of its much-larger ownership position.[23]
Rather than follow the conventional, relatively confidential policy development process, Trump II is starting with the IPO – putting the cart before the horse, as it were – before addressing the necessary business model and capital issues. On top of that, the process is taking place very much in public, allowing everyone to see the “sausage being made,” which has so far been accompanied by a great deal of media hype and speculation.
What alternatives to a large IPO by year’s end might be done instead so that Trump II can claim a policy victory?
Trump II has now invested a lot of its prestige in getting something significant done about F&F by year’s end. As stated above, a $30 billion IPO, even if wildly successful, will not produce a large amount of gain for the government to reduce the deficit materially or seed a sovereign wealth fund, nor will it increase the capital of F&F all that much either – $30 billion is just not that big an amount compared to the federal government budget or even F&F’s total balance sheet.[24] However, there is evidence that indicates the underlying policy objective of considering an IPO is to establish a market price for F&F’s shares so that the administration can record a higher value for Treasury’s large ownership position – potentially generating a budget gain of possibly $200 billion or $300 billion.[25] Given the lack of transparency regarding the value at which Treasury currently holds its investment in F&F, it is unclear what share price would be necessary to record such a large gain.
As described above, a conventional IPO is not likely to be completed by year’s end, and thus, Trump II instead might pursue a creative alternative to deliver some type of transaction in order to claim a policy victory. This could include significantly diluting reforms made since 2008 in order to make the GSE business model more profitable, or to execute an IPO with unusual or unconventional features. Here are three examples of such creative possibilities:
- Solve the shareholder disenfranchisement problem by significantly reducing the regulatory capital requirement so that F&F can exit conservatorship upon completion of the IPO, which would restore those rights.[26] This means the capital requirement has to drop from today’s $333 billion to roughly the $200 billion range.[27] This would, however, be highly criticized by many conservatives, who would view such an action as unsafe and unsound.
- Revise the current tight limits on the mortgage investment portfolios to enable F&F to earn much higher profits, which would help increase an IPO share price. These profits would almost wholly come from taxpayer subsidies to F&F being monetized. As an example, the limits on their portfolios could be raised to $500 billion each, or more than five times their current level but still well less than the peak level pre-conservatorship.
- Sell shares in an IPO to institutional investors who, for non-economic reasons, would pay a high price and be willing to accept restrictions on their ability to sell the shares (which is more like a private placement than a public offering). For example, the sovereign wealth funds of certain oil-producing countries might be willing to do so as a foreign policy matter to build a stronger relationship with the U.S. This would likely be for a much smaller amount than $30 billion, but it could still allow Treasury to value its shares higher and thus record a large budget gain.
Also, there may be an opportunity to switch the IPO from common shares to convertible preferred shares. The conversion price could possibly be used by Treasury to re-value its shares higher, while the period leading to the conversion (perhaps three to five years) would allow issues of shareholder disenfranchisement and business model choices to be worked through in an orderly manner.
To conclude, the administration has major investment banks working on this proposal, and so we will just have to wait and see how creative they and Trump II can be in fulfilling President Trump’s objectives. While a fully conventional IPO by year’s end does not seem likely to be in the cards, a more delayed transaction is one possible outcome, while a creative approach implementable by year’s end could potentially deliver on enough of the transaction’s objectives for Trump II to claim a policy victory.
Footnotes
[1] The same “careful” approach was used during the first Trump administration. It took the form of a presidential executive order (https://www.govinfo.gov/content/pkg/DCPD-201900181/pdf/DCPD-201900181.pdf) followed by six months of work to develop, via Treasury, a “Housing Reform Plan” (https://home.treasury.gov/system/136/Treasury-Housing-Finance-Reform-Plan.pdf) that answered many, but not all, the necessary questions to move ahead.
[2]Such a sale of common stock would not be an Initial Public Offering, or IPO, as F&F have been public companies for decades with their shares continuously outstanding and traded, even during conservatorship. In industry terminology, it would be a “follow-on offering.” However, such a sale is universally being described in the media as an IPO, and so I will use the same terminology for the sake of simplicity.
[3] Not just knowledgeable, of course, but also unconflicted, i.e., free to express a view because they are not employed by the administration or other organization that has a policy position that, in practice, they must support.
[4] A GSE is best thought of as a hybrid of a shareholder-owned corporation and a government agency. It has a charter from Congress that gives it an obligation to fulfill a defined public policy purpose, along with limitations on its activities so it does not focus beyond that purpose, and advantages to help it do so. And of course, it has shareholders who want to maximize profits and returns within the context of the purpose, restrictions, and advantages specified in its charter.
[5]The ERCF was, at the time, criticized for being too large and too complex. It reflected the policy and political views of the FHFA director at that time, Mark Calabria, who has a long history of arguing for a dramatic shrinkage of the role of F&F in America’s housing finance system, if not their outright elimination.
[6] This significant deficiency mostly arises from the ERCF’s consideration of only common equity and not preferred equity when calculating a capital deficiency or surplus. As of now, preferred equity – almost wholly provided by Treasury – exceeds the total net worth of $166 billion, while the GSEs’ “common equity” is a negative $60 billion.
[7]The $375 billion deficiency can be dramatically reduced by converting the existing senior preferred shares (which are owned only by Treasury and relate wholly to the mechanism by which the government rescued F&F in 2008) to common shares, as was done for the only precedent transaction of AIG (discussed further below). It could also possibly take the much more politically controversial step of cancelling the preferred shares outright, as discussed further below. In both cases, this would reclassify $193 billion from “preferred” equity to “common” equity, allowing it to be counted as capital by the ERCF.
[8] The definition of conservatorship is that the powers of shareholders, the board, and management are all transferred to the conservator, which in this case is the FHFA.
[9] Mark Calabria, FHFA director from 2019 to 2021, at one point postulated that F&F could be released from conservatorship before full capitalization under a “consent decree,” a regulatory agreement which, in this case, would give the FHFA a not-yet-specified list of authorities to continue to direct the affairs of the two companies until they were fully capitalized. This could arguably be considered “conservatorship by another name,” i.e., more about optics than substance. The idea did not get fully fleshed out so it is unclear if it is legally acceptable.
[10]This support agreement, known as the Preferred Stock Purchase Agreement (PSPA), is a type of net worth keepwell between Treasury and each of F&F. It worked wonderfully to restore market confidence in the two companies in 2008, even while being short of a full, legal guarantee. This article assumes, as recommended by Trump I’s Treasury, that the PSPA will continue into the indefinite future.
[11] For example, a charge for government support equal to 0.10 percent of liabilities in 2024 would have reduced Freddie Mac’s pre-tax earnings by over 22 percent, and Fannie Mae’s by 20 percent.
[12] See my article: GSE Subsidy Abuse: The History, How Conservatorship Ended It, and the Risk Re-privatization Could Enable Its Return. (https://www.furmancenter.org/thestoop/entry/gse-subsidy-abuse-the-history-how-conservatorship-ended-it-and-the-risk-that-re-privatization-could-enable-its-return).
[13] Getting the input of various interest groups is reliably reported to be taking place in September 2025 in a series of just-scheduled meetings.
[14] The ERCF was established under FHFA director Mark Calabria, who has a long history of GSE criticism and a well-known policy belief that F&F should be either dramatically reduced in size or eliminated altogether. An unduly high capital requirement has the effect of forcing the GSEs to shrink their market share.
[15] For example, the most recent official stress test results, released in August 2025, show no net income loss during the nine-quarter planning horizon of the severe stress test. This test even assumes a significant decline in residential house prices of over 30 percent, larger than what was experienced during the Great Financial Crisis (GFC). It is hard to square this result with the ERCF’s $300+ billion requirement.
[16] If Trump II decided to adopt the 2018 capital proposal, the FHFA could potentially implement it more quickly than the usual minimum of six to nine months, as it has already gone through several APA steps.
[17] The rest relates to the earnings since September 2019, which the companies have been allowed to retain to build capital. In a highly unusual arrangement, all the earnings retained generate an equal amount of additional “liquidation preference,” which adds to the value of the government’s senior preferred shares outstanding. Because this additional amount – currently $166 billion and growing every quarter – was never received in cash by F&F, it does not appear on their balance sheets and thus does not impact ERCF capital calculations.
[18] There were lawsuits about this, all related to the 2012 change in the government’s support agreement with F&F that replaced the existing 10 percent dividend on the senior preferred shares with a “net worth sweep.” The lawsuits were ultimately unsuccessful, while the dividends paid amounted to $301 billion since 2008.
[19] The government bailout of AIG, while it did not involve conservatorship, was similar in financial structure to that of F&F, including a 79.9 percent warrant and senior preferred shares held by the government. Once the company repaired its finances, the government sold out of its stake about three and a half years later, starting with the conversion of its senior preferred stock into common stock.
[20] This was described in more detail above, including links to the two relevant documents.
[21] These issues involve transitioning from a capital structure appropriate for conservatorship to one appropriate for private financing with no remaining government ownership in the two companies.
[22] This “putting the cart before the horse” is not operationally clean, but it certainly seems to have lit a fire under Trump II officials who are now moving faster than I certainly would have ever predicted to address the many complex issues related to GSE reform. Whether it all successfully comes together at the end in a transaction is something yet to be seen.
[23] By the terms of the support agreement between Treasury and each of F&F, Treasury has warrants on 79.9 percent of their common equity shares. Treasury also owns the senior preferred shares, which if converted to common equity would increase Treasury’s ownership share to be even higher. Treasury did such a conversion of the preferred shares to common shares in the case of AIG, the only relevant precedent.
[24] The administration has not indicated whether it will sell the shares of F&F that Treasury owns (called a secondary sale) or, alternatively, that F&F will sell new shares to reduce their capital deficit (called a primary sale). I have referred to both in this article, but this must eventually be settled.
[25] This would be either mostly or totally a non-cash gain. Treasury will need to eventually sell its shares to turn the gain into actual cash receipts.
[26] William Pulte, director of the FHFA, has publicly stated that the administration would like to keep F&F in conservatorship even after an IPO is done. That would not be the outcome in this case.
[27] One prominent Wall Street investor, William Ackman, has already recommended this type of action.
