Fannie, Freddie Could Make $200 Billion For Taxpayers. Shareholders Would Suffer.

Fannie Mae and Freddie Mac underpin the U.S. housing market. Homes in Hercules, Calif. (David Paul Morris/Bloomberg)

The White House still seems quite a ways from deciding what exactly it wants to do with mortgage giants Fannie Mae and Freddie Mac. But one thing is becoming clear: Resolving the last outstanding bailout from the 2008 financial crisis could net taxpayers hundreds of billions of dollars.

That is the message from a report released by the Congressional Budget Office on Thursday. The paper concludes that the U.S. government could end up making $206 billion from its stake in Fannie and Freddie, but only if the mortgage giants were run through receivership.

It’s that last point that will likely give pause to private shareholders in Fannie and Freddie’s stock, since such an outcome would wipe out every stakeholder other than the U.S. Treasury, according to the CBO, which is Congress’s nonpartisan scorekeeper.

After the 2008 bailout, the U.S. government received warrants to acquire nearly 80% of Fannie and Freddie’s common stock as well as a new class of “senior” preferred shares. The senior preferred shares’ liquidation preference is projected to grow to nearly $400 billion by the end of 2026, CBO said. The Federal Housing Finance Agency, run by Director Bill Pulte, controls the companies.

Congress and the White House have struggled for more than a decade to resolve the Fannie and Freddie bailouts. Any change to the companies’ current arrangement carries the risk of spooking investors in the companies’ mortgage bonds, which would drive up mortgage rates.

President Donald Trump in May said he wants to take the companies public. Since then, White House officials have released scant details about when and how that might happen. Treasury Secretary Scott Bessent has said plans to release the companies would come after the administration tackled more pressing priorities like tax legislation and the trade war.

Pulte last week told Barron’s that he believed it’s “likely” Fannie and Freddie stay in conservatorship while the administration considers ways to take parts of them public or sell off pieces of the companies.

For congressional accounting purposes, the sale of Fannie and Freddie wouldn’t count as a windfall for the government, in part because the future profits the companies’ generate would go to private shareholders, the CBO said.

CBO’s paper on Thursday considered two potential paths for restructuring Fannie and Freddie. In both cases, it determined that the companies’ combined market value after the offering would be $368 billion.

In the first, the government would convert its senior preferred shares to common shares before an initial public offering. After the IPO, Fannie and Freddie would be worth $368 billion. New buyers of the companies’ shares would own about $162 billion, while Fannie and Freddie’s existing shareholders would own $206 billion. The government would end up with $170 billion, and $36 billion would go to Fannie and Freddie’s existing private shareholders.

In the second scenario, the government would put Fannie and Freddie into receivership. Since the government’s senior preferred shares get higher priority than existing private shareholders, the Treasury in that scenario would receive all of the $206 billion value of the companies’ stock, CBO said.

That the government would net more money in a receivership isn’t dispositive. More so than the revenue Fannie and Freddie generate, the U.S. government has traditionally been more concerned about making sure the $10 trillion mortgage-backed securities market continues to function smoothly and at low cost. A receivership, even if the government committed to backing Fannie and Freddie’s existing mortgage-backed securities, could give investors pause and drive up rates. Bessent in the past has said that ensuring mortgage rates don’t go up would be the guiding principle in any reform plan.

The CBO report is a “negative headwind” but “recap and release will be a political decision,” wrote TD Cowen analyst Jaret Seiberg in a research note on Friday. “It is why we do not view this as an insurmountable roadblock to getting Team Trump to act.”

Write to Joe Light at joe.light@barrons.com