1. Overview
The Wall Street Journal reported Friday that the Trump Administration is preparing to launch initial public offerings (“IPOs”) for 5–15% of Fannie Mae (“FN”) and Freddie Mac (“FR”) shares later in 2025, with an estimated combined valuation of approximately $500 billion (Link to WSJ article)*.
While the plans remain preliminary, recent meetings with senior bank executives suggest this initiative is a high-priority agenda for the Administration.
Key structural details—such as whether the IPOs will merge the two entities or remain separate, and the extent of the government guarantee on their mortgage-backed securities (“MBS”)—have not yet been disclosed.
2. Market Reaction
Equity Response: Shares of FN and FR surged approximately 20%, bringing their combined market capitalization to around $83 billion**. Given the government’s ~80% warrant coverage and the Administration’s stated $500 billion valuation target, the equity market appears to be pricing in a high probability of a successful IPO*.
Agency MBS Performance: In a somewhat counterintuitive move, Agency MBS spreads tightened following the announcement—meaning prices rose relative to Treasuries. While the move was modest, the direction was notable.
GN vs. FN Dynamics: Ginnie Mae (“GN”) securities experienced a slight appreciation relative to FN, which runs counter to the market’s reaction on FN securities. If FN securities are perceived as more valuable due to the IPO news, one might expect GN to weaken in comparison. This nuance suggests different parts of the market may have interpreted the news differently.
Overall Market Impact: Despite these movements, all changes were marginal, and we would characterize the Agency MBS market as largely unchanged following the announcement.
3. Bright Meadow’s Take
We believe the proposed IPO is largely symbolic, intended to formally list FN and FR on a major stock exchange (as they currently trade on the pink sheets), monetize a portion of the government's equity stake, and showcase the financial gains generated since conservatorship. However, we expect both entities would remain under conservatorship post-IPO.
Risks to the Mortgage Market: If poorly executed, the IPO could pose risks to the $10+ trillion U.S. mortgage market, making this initiative more complex than it may appear. We assign a much lower probability of a successful IPO than the equity market currently reflects. If Agency MBS spreads begin to widen meaningfully, we believe there is a high likelihood the IPO would be shelved.
Government Holdings of Senior Preferred Shares: There has been no additional information on the U.S. government’s senior preferred position which needs to be addressed given the significant impact this can have on required capital amounts, GSE earnings, and the ultimate value of the government’s position in the GSEs.
Capital Requirements: FN and FR require over $30 billion in additional regulatory capital, beyond their retained earnings, to meet minimum requirements. This shortfall will need to be resolved as part of the IPO process*.
Government-Guarantee/Risk-Weighting: The market appears to be greatly discounting the risks associated with an IPO, particularly the possibility that it could proceed without an explicit government guarantee on the securities.
Without a guarantee, we estimate a 10–20 basis point widening in spreads around the par coupon—equivalent to over half a point in price.
If the guarantee is removed and the 20% risk weighting for FN/FH securities is lost, the impact could be more severe, potentially forcing banks to sell holdings due to regulatory constraints.
If the guarantee is preserved—whether through continued conservatorship, explicit backing, or another mechanism—the market impact of the IPO would likely be minimal. On this point, we remain confident that FN/FH securities retain their 20% risk weighting, supported by at least a pseudo-government guarantee, which should limit downside risk.
Policy Signals Around Mortgage Rates: Public comments from President Trump, Treasury Secretary Bessent, and FHFA Director Pulte suggest a strong preference for maintaining or lowering mortgage spreads in the event of an IPO. This implies that some form of guarantee is highly likely to remain. If a guarantee cannot be maintained, we believe the IPO would be shelved and both entities would remain in conservatorship to avoid upward pressure on mortgage rates.
Short-Term Market Dynamics: In the coming months, if uncertainty persists, we could see modest widening in FN/FR securities as some banks and foreign investors shift preference toward GN to reduce exposure.
Potential FN/FR Balance Sheet Expansion: One additional nuance is that expanding FN/FR balance sheets could support MBS valuations. We will be watching closely for any details on this front as the IPO narrative evolves.
4. Implications
Relative Value View: On the margin, we continue to favor the GN/FN swap near par (i.e., long GN vs short FN). The GN/FN swap was already trading somewhat cheap, and the recent headlines should only reinforce the argument for GN relative value versus FN.
MBS Positioning: Bright Meadow has recently been neutral on liquid Agency MBS, and this development does not materially change our stance. We remain more inclined to buy on pullbacks than to initiate shorts, given the muted market reaction.
Investor Sentiment: Friday’s market response should be viewed as a positive signal for investors. One of the most frequent questions we’ve received regarding our MBS positions has been the potential impact of an IPO. The fact that the market largely shrugged off the news should be reassuring.
*Source: The Wall Street Journal, Trump Preparing IPO for Fannie Mae and Freddie Mac Later This Year.
**Source: Bloomberg.