Since the new Trump administration has taken office, there has been renewed speculation about whether Fannie Mae and Freddie Mac would exit conservatorship, and how that might look. The government placed Fannie Mae and Freddie Mac under conservatorship in 2008, a legal status making the Federal Housing Finance Agency their regulator, to stabilize the mortgage and housing markets during the financial crisis. Exiting conservatorship could have ramifications for the government-sponsored enterprises (GSEs) and the U.S. mortgage market.

S&P Global Ratings' base-case scenario is that any developments toward exiting conservatorship will not reduce the likelihood that the current senior obligations of Fannie Mae and Freddie Mac will be met. That view underpins our 'AA+/A-1+' ratings on their senior notes, which continue to have a stable outlook.

We also believe the U.S. Treasury--which the GSEs have a preferred stock purchase agreement (PSPA) with--will seek to avoid disrupting the $14 trillion residential mortgage market.

Our ratings indicate our expectation that the likelihood the U.S. government would provide extraordinary support to the GSEs, if needed, is almost certain. We arrive at the ratings by providing uplift above the 'b-' stand-alone credit profiles (SACPs). The 'b-' SACPs reflect Fannie Mae's and Freddie Mac's lack of capital.

We examine here how changes to the GSE ratings post-conservatorship would depend on any change in our view of the likelihood of extraordinary government support and any change in the SACPs. Government support could evolve based on our assessment of the GSEs' role in the mortgage market or the strength of their link with the government. Our assessment of their post-conservatorship capital levels and business strategies would likely have the largest impact on their SACPs.

Frequently Asked Questions

The Trump administration has called for changes at Fannie Mae and Freddie Mac, including a potentially carefully planned exit from conservatorship that aims to avoid raising mortgage rates. The Federal Housing Financing Agency (FHFA), under its new director, William Pulte, recently removed and replaced a large portion of the GSEs' boards, and Pulte now serves as chairman at both.

However, significant questions remain, as Pulte and the FHFA have not yet laid out a clear path for the GSEs or stated whether they would pursue a plan similar to the Treasury's proposal during the first Trump administration in 2019.

Our forward-looking view on the ratings on Fannie Mae and Freddie Mac will consider various factors. We expect to get further clarity if and when the Treasury and FHFA announce a plan for an exit from conservatorship.

What are the key determinants of our ratings on Fannie Mae and Freddie Mac?

We base our ratings on the GSEs and government-related entities in general on:

• Our view of the likelihood that they would receive extraordinary government support if needed; and
• Our assessment of their SACPs--their creditworthiness excluding any government support.

For Fannie Mae and Freddie Mac, our view to date indicates that they almost certainly will continue to receive government support. As a result, our ratings on their senior debt are at the same level as the sovereign credit ratings on the U.S.

While we rate the senior debt, we do not assign issuer credit ratings to GSEs themselves because they are in conservatorship. We would assign issuer credit ratings if they exited conservatorship.

If the odds of government support dropped, as we see it, the SACPs would also become important determinants of the ratings (see table 1). (see "Rating Government-Related Entities: Methodologies And Assumptions," March 25, 2015).

Table 1

What determines our government support assessment for Fannie Mae and Freddie Mac?

Our view of government support is based on our assessment of Freddie Mac and Fannie Mae's:

Critical role as the consistent provider of liquidity for a large portion of mortgages in the U.S. housing industry, with support for the latter being a key economic and political objective of the U.S. government; and

Integral link with the U.S. government, demonstrated by the U.S. Treasury's remaining funding commitment under the PSPA ($113.9 billion for Fannie Mae and $140.2 billion for Freddie Mac), their preferred equity position discussed previously, and the government's close oversight of the GSEs' strategy and operations through the FHFA.

What will the capital levels and requirements for Fannie Mae and Freddie Mac be post-conservatorship?

Currently, both GSEs operate with substantial capital deficits and are not close to meeting their minimum regulatory capital ratio requirements (see table 2). As of Dec. 31, 2024, Fannie Mae had a $200 billion shortfall to its Tier 1 capital requirement, including buffers, and a $227 billion capital shortfall to its adjusted total capital including buffers. Freddie Mac, by comparison, had shortfalls of $142 billion and $164 billion, respectively.

Table 2

Because of their inability to meet regulatory capital requirements, both GSEs have SACPs capped at 'b-'. In addition, the GSEs had negative capital, as we calculate it, in our risk-adjusted capital framework (RACF).

The GSEs could raise at least a portion of the capital needed through a public offering of equity. However, the amount of capital required may exceed even the largest public offerings executed.

Neither we nor the FHFA counts the government's large senior preferred equity positions as capital. Those positions had book values of $120.8 billion and $72.6 billion at Fannie Mae and Freddie Mac, respectively, with liquidation preferences of $212 billion and $129 billion.

The Treasury's housing reform plan in 2019 suggested a full or partial elimination of those liquidation preferences or exchanging all or a portion of that interest for common stock or other interests in the GSEs. Even with that, we believe it could be difficult for the GSEs to raise enough capital to meet requirements. Meeting existing capital requirements may require some combination of IPOs, an elimination or conversion of the senior preferred equity positions, and retention of capital over multiple years.   

Another consideration is the warrants owned by the Treasury, which give the government the option to purchase shares of common stock equal to 79.9% of the total number of outstanding shares of common stock, on a fully diluted basis, for one-thousandth of a cent per share. In addition, the GSEs may have to address junior preferred positions currently held by investors, totaling $14.1 billion at Freddie Mac and $19.1 billion at Fannie Mae.

The GSEs' capital levels and ability to execute a public capital raise would likely benefit materially from a full or partial write-down of the government's senior preferred position, or if the government surrenders its rights under the equity warrants. We would also view this as an example of government support.

What would the SACPs be if the companies raised enough capital to meet our threshold for adequate capital and earnings?

If Fannie Mae and Freddie Mac were to raise enough capital to reach current regulatory requirements and a level we considered adequate, we would likely sharply raise their SACPs. Based on our current assessment of other parts of their business and financial profiles, the SACPs of the GSEs would probably rise to around 'bbb+'.

However, reaching that level of capital may be difficult, even with a full write-down of the senior preferred, suggesting the SACPs could be lower. If we expected the GSEs to operate below the required regulatory capital levels, we would continue to cap their SACPs at 'b-'.

Theoretically, the FHFA could also update and lower its capital requirements substantially to help the GSEs meet minimum requirements.

If the GSEs were to reach the minimum requirements that way (i.e. through lower requirements), we would not expect to cap their SACPs. We would instead base our assessment of their capital largely on their RAC ratios. (see table 3 in "Financial Institutions Rating Methodology").

As of year-end 2024, Fannie Mae had a capital shortfall of $191.6 billion and Freddie Mac had a shortfall of $149.4 billion to reach a 7% RAC ratio, the threshold for what we typically consider adequate capital. Their shortfall to our adequate assessment would not change based on lower regulatory capital standards.

For Freddie Mac, the government has a senior preferred position with a book value of $72.6 billion (compared with the liquidation value of $129.0 billion). This means that if the government were to decide to write off the senior preferred in its entirety, it would benefit Freddie Mac's capital position by up to $72.6 billion through a gain that would flow through retained earnings. This would leave Freddie Mac $76.7 billion in Tier 1 capital short of our adequate assessment.

For Fannie Mae, the government has a senior preferred position with a book value of $120.8 billion (compared with the liquidation value of $212.0 billion). This means that if the government were to decide to write off the senior preferred in its entirety, it would benefit Freddie Mac's capital position by up to $120.8 billion. This would leave Fannie Mae $70.8 billion in Tier 1 capital short of our adequate assessment.

Would our view of government support and the ratings change if the GSEs exit conservatorship and the PSPAs remain in place--prior to Congress passing any housing finance reform legislation?

We would assess whether either the GSEs' critical role or integral link changed after exiting conservatorship.

In one plausible scenario, the GSEs may exit conservatorship—retaining access to the PSPAs--without Congress passing general housing finance reform legislation. (See the "Details Of The Plan Introduced During Trump's First Term" section.) In that scenario, unless the Treasury and FHFA materially reduced the activity of the GSEs and their substantial market positions, we most likely would continue to view their role as critical.

A continuation of the PSPAs would support the GSEs' link to the government. If we still viewed the link as critical, government support would remain 'almost certain' and be aligned with the sovereign rating.

However, it is likely the PSPAs would have to be materially amended from their current form if Fannie Mae and Freddie Mac are to raise any public equity. We would consider those amendments and the details of any plan or intentions put forth by the Treasury or FHFA for the GSEs.

If we viewed the link as less than integral, perhaps as very strong, the government support assessment could fall to extremely high. With that, and assuming an 'AA+' sovereign rating, the ratings could fall lower in the 'AA' category or into the 'A' category. In a more extreme scenario, the link could fall to strong with a greater drop in the ratings.

What does this mean for the ratings of the junior preferred stock?

The junior preferred stock is currently rated 'D' as the PSPA prevents both Fannie Mae and Freddie Mac from making any payments to the holders of the junior preferred.

If the PSPA is terminated or amended to lift this restriction, and Fannie Mae and Freddie Mac resume making payments to the junior preferred stock holders, we would revise the rating. In this scenario, we would rate the junior preferred stock three or four notches below the SACP.

What other factors could affect the rating?

Our starting point--or anchor--for our ratings on U.S. nonbank financial institutions is 'bb+'. Because of Freddie Mac and Fannie Mae's public policy role and regulated status, we raise their anchors to 'bbb+'. This is to account for the FHFA's strict regulatory oversight, the companies' favorable funding through its close relationship with the U.S. government, and their strong competitive position as part of a de facto oligopoly in providing secondary-market liquidity to the U.S. housing finance market.

We could lower our anchor if we believe regulatory oversight is reduced or if we view their access to funding is more comparable to nonbanks. This could be driven by lower regulatory capital standards, reduced access to funding, or increased competition from private institutions--following the exit from conservatorship--due to reform.

What else might an exit from conservatorship involve?

The housing reform plan from President Trump's first term suggested that the exit from conservatorship could involve the GSEs being placed in receivership "to the extent permitted by law, to facilitate a restructuring of the capital structure."

Under the receivership option, we believe the GSEs could enter receivership and successor entities could be created to carry out new business as guarantors. (The plan alluded to potential successor entities two times.) After exiting conservatorship, a liquidation process could begin.

We think the FHFA, as receiver, could transfer, at its discretion, certain assets and liabilities of each housing GSE to a limited-life regulated entity (LLRE). The LLRE could succeed the Congressional charters of each housing GSE and carry on some of its operations while the GSE winds down. We assume that a large portion of the existing assets and liabilities could move to the LLRE.

We believe it is premature to assess the rating implications of such a hypothetical scenario. However, generally speaking, even in receivership, the odds that the current obligations of the housing GSEs would be met--most notably their senior and subordinated debt and the guarantees of mortgage-backed securities (MBS)--may not necessarily decline. One possible rationale is the government could strive to avoid a move that could have a major impact on banks, money market funds, and the other holders of the trillions of dollars of debt and MBS of the housing GSEs.

What will the market positions of Fannie Mae and Freddie Mac be after the conservatorship?

The Treasury's previous plan looked to spark greater private capital participation in the mortgage market. Pending comprehensive housing finance reform and eliminating the PSPAs, the 2019 plan indicated that Treasury could tailor support through the PSPAs depending on the GSEs' involvement in cash-out refinancings, investor loans, vacation home loans, higher principal balance loans, or other subsets of GSE-acquired mortgage loans. In other words, the GSEs would have reduced their footprint in some riskier areas.

A more dramatic redesign of the housing finance system would entail the GSEs competing against other newly charted, FHFA-regulated guarantors, but this would require legislative change by Congress. Each guarantor would likely have a smaller market share than each GSE has today, perhaps making them individually less crucial to the overall market.

If any of these changes reduces the critical role the GSEs play in the mortgage market, we may conclude that they are less likely to receive extraordinary government support in the future. If we came to that conclusion, we would either assign less or no uplift in the rating for that likelihood, compared with our SACP on each GSE (rather than equalizing the ratings on the GSEs with those on the federal government).

Details Of The Plan Introduced During Trump's First Term

The Treasury's plan aimed to reform and, in certain areas, limit how the GSEs and the federal government (particularly through the FHA and Ginnie Mae) provided support to the housing market, encouraged more private capital and competition in housing finance, protected taxpayers against bailouts, and maintained stability in the housing market and access to the 30-year fixed-rate mortgage.

Some key recommendations of the 2019 plan included:

• Developing a recapitalization plan for the GSEs that likely would involve issuing common or preferred shares to private investors and perhaps convertible debt or other loss-absorbing instruments;
• Having the FHFA, the regulator and conservator of the GSEs, release the GSEs from conservatorship "as promptly as practicable" once they retained or raised sufficient capital;
• Passing legislation to authorize Ginnie Mae to provide "an explicit, paid-for guarantee"--a catastrophic backstop--of qualifying MBS on which a GSE or other guarantor first provides primary credit enhancement;
• Allowing the FHFA to charter new guarantors to compete against Fannie Mae and Freddie Mac;
• More narrowly defining the roles of the GSEs and the FHA to prevent overlap between the two, particularly in how they support affordable housing; and
• Improving the risk management of the FHA and having it refocus on "providing housing finance support to low- and moderate-income families that cannot be fulfilled through traditional underwriting, including targeting first-time and lower-wealth creditworthy homebuyers."

The plan would have replaced any implicit or explicit support for the GSEs themselves with an explicit guarantee of MBS meeting certain standards. We believe the aim was to remove the moral hazard of implicit support for specific legal entities, replacing it with an explicit guarantee on MBS called upon only after private investors absorb significant losses. The plan would also allow new entities to compete as FHFA-regulated guarantors against Fannie Mae and Freddie Mac.

However, several parts of the plan would have required legislation, and we are uncertain about Congress's appetite for passing broad housing finance reform. The complexity and implications of such legislation make that very difficult, and unlikely in our view.

Coming to an agreement on the ultimate structure of the housing finance market as well as federal support for affordable housing will likely remain challenging. Without legislation, Ginnie Mae could not provide a catastrophic guarantee on MBS and the FHFA could not charter new guarantors to compete against Fannie Mae and Freddie Mac.