In 2008, following the Great Financial Recession, the U.S. government seized control of Fannie Mae and Freddie Mac - two privately held companies that, at the time, backed between 40% and 50% of all residential mortgages in the country. Although chartered thirty-two years apart, Fannie Mae and Freddie Mac are, in practice, nearly identical enterprises: they perform the same core function (guaranteeing and securitizing conforming residential mortgages), answer to the same regulator, and carry the same form of government backing - the differences between the two are matters of scale and legacy client base, not business model. [1] The arrangement placing them under government control, known as conservatorship, was designed to be temporary. Seventeen years later, it remains in place. The Trump administration has signaled that the end of the status quo for these "quasi-government" companies may be closer than markets expect, prompting KFSC Macro Intelligence to take a closer look at both entities within our macro-regime framework.

This commentary is intended to keep clients informed about a situation we are monitoring, not a position we currently hold. Any future allocation would be small, risk-managed, and evaluated alongside the financial stability and profitability criteria we apply to every candidate holding.

01 · OVERVIEW

What Are FNMA and FMCC?

Fannie Mae (Federal National Mortgage Association, ticker FNMA) and Freddie Mac (Federal Home Loan Mortgage Corporation, ticker FMCC) are Government-Sponsored Enterprises (GSEs) - privately owned, shareholder-held corporations chartered by Congress to support U.S. housing finance. [1] Together they touch approximately 60%–70% of U.S. home mortgages, making them among the most systemically significant financial institutions in the country by footprint, even though they are not household names like the large banks. [2]

02 · BACKGROUND

Historical Context

Fannie Mae was created in 1938 to buy mortgage loans from banks during the Great Depression, a period when many banks had failed and simply stopped making new loans - leaving ordinary families unable to get, or renew, a home mortgage at all. Freddie Mac followed in 1970 to build a secondary market for those loans, bundling them into mortgage-backed securities (MBS) and selling them to investors. [1] Both were privatized, NYSE-listed companies for decades - ordinary public stocks - until the 2008 financial crisis.

03 · PURPOSE

FNMA & FMCC Functions

The GSEs function like an insurance layer for the mortgage market: they guarantee payment to MBS investors if homeowners default, which lowers the risk lenders take on and, in turn, lets lenders offer borrowers a lower rate. In practical terms, this produces three effects: (1) more money consistently available for home loans, because investors trust GSE-backed securities enough to keep buying them even during downturns; (2) more standardized, uniform loan terms nationwide, since lenders build their loans to GSE guidelines in order to qualify for the guarantee; and (3) broader access to homeownership than a fragmented, purely private lending market would likely support on its own. [3]

04 · BUSINESS MODEL

How Do the Companies Make Money?

Revenue comes from two lines of business:

• Guarantee fees ("g-fees"). Lenders pay Fannie Mae or Freddie Mac a small recurring fee - charged in basis points, or hundredths of a percentage point, on the loan balance - in exchange for the companies' promise to make MBS investors whole if a borrower defaults. This is the larger, steadier revenue source for both companies today. As of year-end 2025, average charged guarantee fees on single-family loans ran roughly 49–55 basis points at both companies - meaning that for every $100,000 of mortgage balance guaranteed, the companies collect somewhere around $490 to $550 per year in fee income. [4], [5]
• Investment portfolio income. Both companies also hold a smaller book of mortgages and MBS directly on their own balance sheets, earning the spread between what they pay to borrow and what those assets yield. [3]

For full-year 2025, Fannie Mae reported net revenues of $29.0 billion and net income of $14.4 billion - its 14th consecutive profitable year - with net worth reaching a record $109.0 billion. [5] Freddie Mac reported net revenues of $23.3 billion and net income of $10.7 billion, with net worth of $70.4 billion. [4] Both figures declined year-over-year (Fannie Mae net income down 15%; Freddie Mac down 10%), but the decline was driven mainly by lower non-interest income - chiefly smaller investment gains - and higher provisions for credit losses, not by any weakness in the core guarantee-fee business, which held essentially flat to modestly higher at both companies. [4], [5]

05 · THE 2008 CRISIS

Why Did the Government Intervene?

Both companies had taken on far more mortgage credit risk than they disclosed. A large part of that hidden risk sat in "Alt-A" loans - mortgages that fall between prime (strong credit, fully documented) and subprime (weaker credit) in risk, often approved with reduced income or asset documentation, sometimes called "low-doc" or "no-doc" loans. The SEC later found Fannie Mae's actual combined subprime and Alt-A exposure was roughly $641 billion versus about $8 billion disclosed, with a similar gap at Freddie Mac. [6] When the housing market collapsed, both firms neared insolvency, threatening the broader financial system.

In September 2008, the newly created Federal Housing Finance Agency (FHFA) placed both into conservatorship under the Housing and Economic Recovery Act. In exchange for the emergency funding that kept both companies solvent, Treasury received two things it still holds today: a senior claim on each company's value - meaning Treasury must be repaid in full before any other shareholder sees a dollar - and warrants (options) to purchase up to 79.9% of each company's common stock at a nominal price, effectively giving the government the right to take majority ownership of both companies whenever it chooses to exercise them. [1] This senior claim and these warrants are precisely why FNMA and FMCC are on our radar today: how they get unwound is the central open question in any conservatorship exit, and it will determine most of the potential value - or lack of it - available to common shareholders. We return to this in more detail in Sections 07 and 08 below.

06 · LEGAL STRUCTURE & CURRENT STATUS

Conservatorship vs. Receivership - and Why It's Still Unresolved

Conservatorship is meant to be a temporary rehabilitative status: the regulator (FHFA) steps in to stabilize a troubled company with the goal of eventually returning it to normal operation. Receivership, by contrast, is a terminal status used to wind a company down, liquidate it, or merge it into another entity - it does not contemplate the company continuing independently. Some reform proposals reportedly discuss placing one GSE into receivership so the other could absorb its assets, a path analysts note could combine the two firms without new legislation from Congress. [3]

Seventeen years after entering what was billed as a short-term fix, both companies remain under FHFA conservatorship. Resolution requires agreement on three things: the government's preferred-stock claim, its warrants to acquire up to 79.9% of each company's stock, and a capital shortfall that persists even after record 2025 earnings. Fannie Mae's own filings show an actual CET1 capital deficit of $41 billion as of December 31, 2025, relative to the post-crisis capital standards that remain suspended while the company is in conservatorship; independent analysts estimate the combined shortfall across both companies is considerably larger under those same rules once fully applied. [5], [7]

What is CET1 capital, and why does this number matter so much? Common Equity Tier 1 (CET1) capital is the highest-quality form of capital a regulated financial institution can hold - common stock and retained earnings - set aside specifically to absorb losses before creditors, counterparties, or the government need to step in. Regulators require it because it is the cushion that keeps a downturn from turning into another bailout. Under the Enterprise Regulatory Capital Framework (ERCF) adopted after the 2008 crisis, Fannie Mae and Freddie Mac are now held to CET1 requirements modeled closely on those imposed on large banks. [7] Critics of this approach - including Pershing Square and Michael Burry - argue it is a mismatched standard: the GSEs are not depository lenders funding loans with customer deposits the way a bank does; their core business is closer to a mortgage insurer's, guaranteeing a fee-based promise rather than holding most of the credit risk on borrowed money. Applying bank-style capital rules, these critics contend, forces an unrealistically large capital build - or unrealistically high guarantee fees - relative to the actual risk the companies carry. [7], [9] Whichever view is correct, the practical reason this metric matters is straightforward: FHFA has signaled it will not let either company fully exit conservatorship, relist on a major exchange, or complete an IPO until this capital gap is closed or the requirement itself is relaxed. It is, in effect, the single biggest gatekeeping metric standing between today's OTC-traded stock and any future resolution.

Public commentary from Fannie Mae's and Freddie Mac's former CEOs describes the current administration's plan as still a "work in progress" - more of a political opportunity to announce a large IPO than a fully developed transition plan. [8] One clarification worth flagging here: an IPO (Initial Public Offering) is the process by which a private company sells shares to the public for the very first time, typically to raise new capital and gain a listing on a major stock exchange. FNMA and FMCC do not fit that description today - their shares already trade publicly, over-the-counter, on what is commonly called the "pink sheets." They were never taken fully private; they were only removed from the NYSE in 2010 and pushed into this thinner, less-regulated corner of the market. That means the widely used term "IPO" is not technically accurate for what is being discussed here. What administration officials are actually describing is more precisely a relisting: moving existing, already-public shares from the OTC market onto a major national exchange such as the NYSE, which could happen with or without Treasury also selling new or existing shares alongside it. The distinction matters because a relisting alone - without any new shares being sold - could unlock institutional demand and improve liquidity, even before any of the harder capital and legal questions below are resolved. [9]

07 · GOVERNMENT INTEREST, SHAREHOLDERS & THE VALUATION CASE

The Government's Stake - and Why the Math Behind It Is Our Investment Thesis

The government's position. Treasury holds two things: a Senior Preferred Stock (SPS) claim and warrants to purchase 79.9% of each company's common stock at a nominal price. [9] As of December 31, 2025, the combined SPS liquidation preference stood at approximately $367 billion - $227.0 billion at Fannie Mae and $140.2 billion at Freddie Mac - and it grows each quarter the companies retain earnings rather than pay Treasury a cash dividend. [4], [5]

Treasury has already been made whole. Treasury originally advanced roughly $193 billion combined to keep both companies solvent between 2008 and 2011. Since then, it has collected approximately $301 billion in dividends from the two companies - more than $100 billion above what it put in. [9] By any conventional measure of a loan or investment, Treasury has already recovered its principal plus a healthy return. This is the core argument Pershing Square and other analysts make for why the SPS claim could reasonably be deemed "repaid" going forward, rather than continuing to be enforced at its full face value. [9]

Common shareholders, by contrast, have received nothing. Fannie Mae's own FY2025 financial statements show that, of $14.364 billion in total net income, only $9 million was attributable to common stockholders - the remainder was swept, in one form or another, to the senior preferred position Treasury holds. [5] Michael Burry puts it plainly: "common shareholders have no economic rights in a conservatorship." [7] No cash dividend has reached common or junior preferred shareholders since the companies entered conservatorship in 2008.

The bull case, and the valuation "disconnect." This is where Pershing Square (Bill Ackman) and Michael Burry converge, despite holding differently sized positions and differing levels of conviction. Both lay out broadly the same three-step path out of conservatorship: (1) treat the Senior Preferred Stock as effectively repaid, given the dividends already collected; (2) have Treasury exercise its warrants for 79.9% of each company - dilutive to existing shareholders, but converting a contractual right into real equity Treasury can later sell; and (3) relist both companies on the NYSE, which both analysts argue could happen even before conservatorship formally ends, since they contend both companies already meet the exchange's listing requirements today. [9], [7] Under scenarios where the SPS claim is substantially reduced and the companies relist, both analysts model common share values meaningfully above where the stock trades today - Pershing Square's own framework, for instance, models a jump toward roughly $42–44 per share under one relisting scenario, against an OTC price they characterized as trading at only 3.5–3.7x trailing earnings. [9] This is the heart of the "disconnect" thesis we are monitoring: if even a portion of the SPS claim is resolved in shareholders' favor, these analysts' own models suggest today's price does not reflect the companies' earnings power or book value. We want to be direct that this is a scenario-dependent, analyst-driven argument, not a certainty - and that both Ackman and Burry hold large positions in these stocks, so their models should be read as advocacy as much as analysis. [9], [7]

Why the stock trades where it does. Part of the reason this gap can persist is structural: FNMA and FMCC were delisted from the NYSE in 2010 and have traded over-the-counter ever since. Many large institutional investors - pension funds, index funds, and a substantial share of mutual funds - are restricted by their own mandates from buying securities that are not listed on a major national exchange, regardless of how attractive the valuation case may be. [9] That has left the shareholder base concentrated among retail investors, a handful of specialty funds, and a few large, vocal holders like Pershing Square and Burry - which limits the capital available to close the valuation gap even if the underlying thesis proves correct, unless and until a relisting actually happens. [9]

The public benefit. Separately from the valuation question, the public benefit of these companies runs through mortgage access and cost. In 2025, Freddie Mac financed 1.1 million mortgages - 53% affordable to low- and moderate-income families - plus 617,000 rental units, 93% of which were similarly affordable. [4] Fannie Mae provided $409 billion in market liquidity supporting roughly 1.5 million home purchases, refinances, and rental units, with first-time homebuyers making up more than half of its single-family purchase loans. [5] Independent mortgage bankers - who originate the large majority of GSE-backed loans - have specifically asked regulators to preserve g-fee parity, a competitive cash window, and continued support for niche loan products (rural, manufactured, multifamily) as any exit from conservatorship is designed, arguing these features protect smaller lenders and, by extension, consumers. [10]

08 · TREASURY'S BALANCE SHEET

How Could This Interest Be "Monetized"?

The current administration has discussed "monetizing" the asset side of the federal balance sheet more broadly, including through a new sovereign wealth fund. [11] For the GSEs specifically, monetization could take a few forms: (1) a relisting on the NYSE that unlocks institutional demand without an immediate share sale; (2) exercising the government's warrants and later selling some of the resulting equity stake; or (3) a "mark-to-market" accounting recognition of the government's existing stake, which raises the reported value of the asset without necessarily generating cash. [12] Separately, GSE purchases of their own MBS have been floated as a lever to influence mortgage rates directly. [8]

The warrants carry a hard deadline. The government's warrants to acquire 79.9% of each company expire in September 2028. [7] That deadline is one reason the administration is widely expected to act on a conservatorship resolution during this presidential term: most analysts, including Burry, treat exercising the warrants before they expire as the far more likely path, since letting them lapse would mean forfeiting the government's right to a 79.9% equity stake for nothing in return. [7] That said, allowing the warrants to expire unexercised is not impossible, and some analysts flag it as a real, if unlikely, alternative outcome worth tracking - one that would leave Treasury holding only its senior preferred claim, with no equity upside of its own. [9]

09 · RISKS

What Are the Challenges Ahead?

• Capital shortfall: both companies remain undercapitalized relative to post-crisis rules - a gap that cannot be closed by earnings alone in the near term. [7]
• Legal uncertainty: how the Senior Preferred Stock claim is resolved could significantly affect - or eliminate - value for common shareholders. [7]
• Mortgage rate risk: independent estimates suggest privatization scenarios could raise typical mortgage payments by $500 to $2,000 per year, depending on design, which is itself a political constraint on how far reform can go. [3]
• Execution risk to the guardrails: some commentators warn that a hastily executed privatization, without strong capital and oversight guardrails, risks recreating pre-2008 risk-taking incentives. [16]
• Liquidity risk: the shares currently trade over-the-counter, not on a major exchange, meaning wider spreads and greater sensitivity to headlines and rumor rather than fundamentals. [2]

10 · WHY WE ARE WATCHING

Why Fannie Mae and Freddie Mac Are on the Watchlist for the KFSC Risk Managed Strategies

Three administration officials have spoken on the record about the government's stake in these two companies. Scott Bessent, the Treasury Secretary, said Treasury is studying a privatization designed so that mortgage spreads do not widen. [13] Bill Pulte, the Director of the Federal Housing Finance Agency, said the President wants to take the companies public rather than privatize them, and said they could one day be worth trillions of dollars. [14] That figure is his own estimate, not a reported company number. Howard Lutnick, the Commerce Secretary, said the model of taking the companies public has merit, that the President supports it, and that the aim is to show mark to market what the American taxpayer owns. [15]

Our advisors watch this as a federal balance sheet question, not as a housing stock. When a government looks for ways to turn what it owns into money, that is a change in how the federal balance sheet is run, and these two companies are where it is being tried first. That is the subject KFSC Macro Intelligence follows within the macro-regime framework. The combined senior preferred liquidation preference stood at approximately $367 billion at December 31, 2025, $227.0 billion at Fannie Mae and $140.2 billion at Freddie Mac, and it grows each quarter the companies retain earnings rather than pay Treasury a cash dividend. [4], [5]

The statements above are quoted from the recorded interviews at references [13], [14] and [15]. The company figures are as officially reported in each company's fourth-quarter and full-year 2025 earnings release. [4], [5] Figures for the five financial years to 2025, and for the composition of shareholders equity, are from the standardized accounts at reference [17]. The shareholder register is from reference [18].

A statement of intent by an official is not a decision, a schedule or a signed term sheet. Two cases are argued over what follows, and both are set out below in the terms their own proponents use. Neither is a recommendation.

THE CASE ARGUED IN FAVOUR

1. Both companies are profitable. Fannie Mae 2025 was its 14th consecutive profitable year. [5]
2. The core business held up. The 2025 earnings decline came from lower non-interest income, chiefly smaller investment gains, and higher provisions for credit losses. The guarantee-fee business was flat to modestly higher at both companies. [4], [5]
3. Book value is building. Net worth of $109.0 billion at Fannie Mae and $70.4 billion at Freddie Mac. Every retained dollar adds to it. [4], [5]
4. Treasury has been made whole in cash. Roughly $193 billion advanced between 2008 and 2011 against roughly $301 billion collected since. That is the factual basis for the argument that the senior preferred claim could reasonably be deemed repaid. [9]
5. A valuation gap is argued if the claim is resolved. Pershing Square characterized the over-the-counter price as 3.5 to 3.7 times trailing earnings. That is their own framework and they hold a position in it. [9]
6. A relisting may not require conservatorship to end first. Both Pershing Square and Michael Burry contend the companies already meet the New York Stock Exchange listing requirements today. [9], [7]
7. Part of the discount is structural rather than fundamental. Both companies were delisted in 2010 and have traded over the counter since. Pension funds, index funds and a substantial share of mutual funds are restricted by their own mandates from holding them. [9]
8. The 2028 deadline gives the government its own reason to act. The warrants expire in September 2028. Letting them lapse would forfeit a 79.9% equity stake for nothing in return. [7]
9. Administration officials have said publicly that they want it done. The Director of the Federal Housing Finance Agency on taking the companies public, and the Commerce Secretary saying the President supports it. [14], [15]
10. The public benefit gives policymakers a reason to want them working. Freddie Mac financed 1.1 million mortgages in 2025, 53% affordable to low- and moderate-income families, plus 617,000 rental units, 93% similarly affordable. Fannie Mae provided $409 billion in market liquidity, with first-time buyers more than half of its single-family purchase loans. [4], [5]

THE CASE AGAINST

1. Common shareholders have no economic rights in conservatorship. Michael Burry states it in those words, and it is the plainest description of the position. [7]
2. The profit does not reach the common shareholder, and it is not one bad year. Of Fannie Mae $14.364 billion of net income for full-year 2025, $9 million was attributable to common stockholders, six hundredths of one percent. [5] The standardized accounts show the same line at $3 million in 2024, $3 million in 2023, $3 million in 2022 and $78 million in 2021. Ninety-six million dollars in total across five years. [17]
3. No cash dividend has been paid to common or junior preferred shareholders since 2008. That is the whole period of conservatorship, not a recent stretch.
4. The claim ranking ahead of the shareholder grows. The combined senior preferred liquidation preference stood at approximately $367 billion at December 31, 2025 and increases each quarter the companies retain earnings rather than pay Treasury a cash dividend. A profitable year enlarges it. [4], [5]
5. Exercising the warrants dilutes the existing common shareholder. Up to 79.9% of each company common stock at a nominal price, and that step sits inside the case in favour rather than outside it. [9]
6. The capital shortfall is open. Fannie Mae filings show a Common Equity Tier 1 capital deficit of $41 billion at December 31, 2025, larger across both companies under the same rules fully applied, and it cannot be closed by earnings alone in the near term. [5], [7]
7. Receivership remains available. Reform proposals have reportedly discussed placing one company into receivership so the other could absorb its assets. Receivership is a terminal status, not a rehabilitative one. [3]
8. The outcome is a political decision rather than an operating result. How the Senior Preferred Stock claim is resolved could significantly affect, or eliminate, value for common shareholders. No analysis of the business settles it. [7]
9. Reported earnings have fallen since 2021. Net income after tax of $22.176 billion in 2021, $12.923 billion in 2022, $17.408 billion in 2023, $16.978 billion in 2024 and $14.364 billion in 2025. Four of those five years are below the first. [17]
10. The politics cap how far reform can go. Independent estimates suggest privatization scenarios could raise typical mortgage payments by $500 to $2,000 per year depending on design, and some commentators warn a hastily executed privatization risks recreating pre-2008 risk-taking incentives. [3], [16]
11. The security itself is fragile, and the register is thin. The shares trade over the counter rather than on a major exchange, which means wider spreads and greater sensitivity to headlines and rumor than to fundamentals. [2] Eighty-four institutions report holding 21.19% of the shares between them, the largest three hold 20.03%, and the remaining four fifths of the register is held by no institution that files. [18]

WHAT AN INDEPENDENT RATING AGENCY SAID

Both lists rest on one fact. Argue that the Senior Preferred Stock claim is repaid and every point in the first list is live. Enforce it at full face value and every point in the second list is. Nobody has decided, there is no date by which anyone must, and the two loudest voices making the first argument hold large positions and are reading their own book. [9], [7]

HOW THIS WOULD SIT ALONGSIDE WHAT THE STRATEGIES ALREADY HOLD

The KFSC Risk Managed Strategies already hold gold, and hold it structurally. Gold is held on the monetary thesis and reviewed on that thesis, not traded to manage a fall in its price.

If our advisors were to add an exposure to these two companies, it would sit next to that position, and the two would be expressions of the same idea. Gold is held because of what a government does to its own currency. A claim on Fannie Mae and Freddie Mac would be held because of what a government does with its own assets. Both are readings of the same federal balance sheet, taken from different sides of it.

That is a reason to size an exposure small and to say so plainly. Two positions that pay off in the same conditions are one position held in two instruments, and holding both would concentrate the strategies on a single reading of the federal balance sheet rather than spread them across several. Our advisors would weigh that at the strategy level, across the six mandates from Preservation of Capital through Aggressive Growth, before any allocation was made, and the weighing would not rest on this reading alone.

Neither company is held in the KFSC Risk Managed Strategies today. Our advisors are studying both. Two questions decide the outcome: the capital structure, and the terms of any exit. Both are open. As of the data reviewed, the current read is no change, and that read is subject to change as new information arrives. If an exposure of this kind were ever taken, position sizing would be set at the strategy and model level by the client's selected risk option, from Preservation of Capital through Aggressive Growth, and it would not be appropriate for every mandate or for every client. Reading these markets is our work, not yours. Nothing here asks you to do anything at all.

SOURCES

References in order of appearance

IMPORTANT DISCLOSURES

Disclosures and risk warnings