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Investing.com-- Fannie Mae and Freddie Mac privatization is back in focus as U.S. regulators signal possible steps to end conservatorships. But Bank of America expects any major change to be gradual, with government backing remaining firmly in place for now.
“Ending conservatorships with no other changes would transition the GSEs back to private management without changing the explicit $254 billion government backing,” Bank of America said in a recent report. “This may be the path of least resistance available for an optical step forward in GSE reform.”
While Treasury Secretary Bessent recently teed up the idea of selecting advisers for a public offering by October and indicated the Trump administration would aim to keep mortgage spreads stable. He also mentioned a "housing emergency" may be declared in the fall.
A full IPO, however, seems unlikely before conservatorships end or a clear post-conservatorship framework is established, BofA said, expecting that the probability that government backing, either explicit or implicit, will remain firmly in place for the foreseeable future.
The federal backstop providing a cushion against a Fannie/Freddie potentially experience a negative net worth, is currently provided through preferred stock purchase agreements with $254 billion in Treasury funds, supporting mortgage and unsecured debt spreads, which Bank of America expects to remain stable. The bank also projects that any reduction in FHFA capital requirements could enhance private investor demand but would likely face legislative scrutiny.
A sale of public equity would return earnings and ownership to private shareholders, but would require congressional action to reshape the government guarantee system. Without such changes, new shareholders could remain vulnerable to future shifts in FHFA oversight, potentially limiting equity value.
Large portfolio growth at Fannie and Freddie, meanwhile, remains an unlikely outcome. The GSEs have room to grow holdings modestly, but the focus will likely stay on managing portfolios and maintaining government support over expanding unsecured debt issuance.
"We would be surprised to see a return to large portfolios at Fannie/Freddie, which include the securities and whole loans financed on balance by unsecured debt," BofA added.
While reform under the current administration appears more active than in previous years, the bank believes that significant progress depends on congressional involvement and clear policy direction.
"Congress may be needed for additional structure in creating a private mortgage insurance system into which the GSEs could be more successfully sold," BofA said. "Since 2008, this has been the main holdup for GSE reform as 60+ majorities in the Senate are rare," it added.