By Shaina Mishkin

Fannie Mae and Freddie Mac shares have rallied on hopes of a conservatorship-free future as questions remain about its government backing. Without it, home values won't slide, and the economy won't suffer, one analyst writes. But prospective buyers could face higher mortgage rates, with a negative impact for home builders.

Investors in Fannie Mae and Freddie Mac are betting that Donald Trump's administration will remove the mortgage giants from the government conservatorship they have been under since the 2008 financial crisis. The companies' common shares have rallied 113% and 84%, respectively, this year, according to preliminary Dow Jones Market Data.

The stocks are "quite speculative," says KBW analyst Bose George, who notes that the common shares move on the possibility that the companies will be privatized. That is despite ongoing debate about how they would exit their government conservatorship, and whether that would dilute the companies' common shares, he notes.

There are still plenty of unanswered questions and reasons for caution that suggest any potential privatization of the companies will come well down the road, if at all. Barron outlined the potential hurdles in January.

"The expectation is that it will take time, mainly because it remains a very complicated situation," George says. "Even in a best-case scenario, this is something that takes multiple years."

Among the questions: what will become of the implied government guarantees on the companies' mortgage-backed securities?

Gavekal Research analyst Tan Kai Xian argued in a Wednesday report that privatizing the companies would likely remove their government guarantees. The administration's reason to remove the companies from conservatorship "would be to reduce taxpayers' exposure to mortgage market risks and to promote private competition in the home loan market, " the analyst wrote. "Both objectives imply removing the taxpayer guarantees that allow the agencies to borrow at advantageous rates."

The White House referred Barron's request for comment on parts of the report to the Federal Housing Finance Agency, which didn't respond to a request for comment. Freddie Mac and the U.S. Treasury also didn't respond to a request for comment. Fannie Mae declined to comment.

There has been little official word recently on plans for removing the companies from conservatorship. But The Wall Street Journal on Sunday, citing a person familiar with the matter, reported that the administration has considered directing departments to study the privatization.

Privatizing the companies in a way that removes the government guarantee could result in higher mortgage rates, wrote Xian.

"The negative impact of any upward pressure on mortgage rates caused by the privatization of Fannie and Freddie will likely be significant for U.S. home builders," he wrote. "But it will be mild for house prices, the average consumer, and the overall economy."

Among the reasons the analyst cited: since most U.S. mortgages are fixed rate, the immediate impact of higher mortgage costs on overall consumption would be minimal. "This will be little consolation for U.S. home builders, who sell to people taking out new mortgages," he wrote.

Home prices will remain firm because of other policies, like the administration's stance on tariffs and immigration, wrote Xian. That could be a positive for homeowners concerned about an impact on home equity.

In the big picture, residential fixed investment is a relatively small slice of gross domestic product, he added. "As a result, while there may be knock-on effects on spending on furniture, appliances, and other big-ticket domestic items, weaker housing demand is unlikely to have a major impact on overall economic growth, especially if house prices remain stable or keep rising," he wrote.

The government could mitigate the mortgage rate impact by making moves only when interest rates are falling, the analyst noted. Previously, FHFA and Treasury officials indicated a desire to avoid housing market disruption. Treasury Secretary Scott Bessent told Bloomberg in February that the department was prioritizing tax policy before potential Freddie Mac and Fannie Mae reforms, and that a potential removal from conservatorship would depend on mortgage rates.

FHFA director Bill Pulte signaled patience in his approach to the companies' potential privatization. "Any exit from conservatorship must be carefully planned to ensure the safety and soundness of the housing market without upward pressures on mortgage rates," he said during his February confirmation hearing.

Write to Shaina Mishkin at shaina.mishkin@dowjones.com

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March 27, 2025 16:21 ET (20:21 GMT)

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