From “Buy” to “Neutral” in five months: Mizuho downgrades Fannie Mae and Freddie Mac, privatization expectations cool rapidly

According to Zhitong Finance APP, Mizuho Securities recently downgraded Fannie Mae (FNMA.US) and Freddie Mac (FMCC.US) from “Buy” to “Neutral,” slashing both target prices: Fannie Mae from $10 to $5 and Freddie Mac from $9 to $4. This downgrade comes just five months after Mizuho first initiated coverage and assigned a “Buy” rating.

Analyst Dan Dolev admitted in his research report that the probability of the two GSEs completing privatization before 2028 is declining. He lowered the probability of Fannie Mae’s privatization from 30% to 18%, and Freddie Mac from 20% to 9%. This shift echoes moves by “Big Short” Michael Burry, who has sold both common stocks and switched to preferred shares.

Mizuho: Significantly Lowered Privatization Probability

When Mizuho first covered the two companies in May, their core logic was that the market was seriously underestimating the probability of an IPO before 2028. At that time, Dolev’s “rapid exit” plan included a 2.5% capital requirement, government preferred share repayment provisions, and accelerating capital accumulation by raising the guarantee fee (g-fee).

But five months later, all three assumptions have become less certain.

In his latest report, Dolev listed three reasons: First, rising mortgage rates make privatization more complex. If the two entities raise g-fees to exit government control, this would directly increase mortgage costs—politically unfeasible in the current climate of housing affordability sensitivity. Second, U.S. Federal Housing Finance Agency (FHFA) Director Bill Pulte’s recent statements that the GSEs will buy more mortgage-backed securities (MBS) helps lower rates in the short term but depletes their capital. Third, the addition of VantageScore to the FICO Classic system and the reintroduction of the “dual-merge” credit scoring method increases the complexity of credit risk management.

Dolev pointed out that the first barrier introduces political complexity for privatization, while the latter two slow the pace of capital accumulation. He expects the GSEs won’t offset losses by raising g-fees, making capital accumulation slower and pushing a fully capitalized timeline further away.

Burry Sells Common Stock, Buys Preferred Shares

In his Substack post last weekend, Burry disclosed that he has cleared out all common shares in the two institutions and instead purchased multiple series of subordinated preferred shares. His core reasoning: The U.S. Treasury holds $388 billion in senior preferred shares, and if converted to common stock, current common shareholders could face at least 90% dilution.

But Burry is not bearish on the GSEs themselves. He noted Fannie Mae’s subordinated preferred shares currently have a market value of about $6 billion with a face value of $19 billion, trading at roughly one-quarter of par value. If dividends are resumed or if converted at par, the expected return is approximately 3 to 5 times. Within the capital structure, preferred shares enjoy both dividend and liquidation preference over common shares, so even if the Treasury were to convert, preferreds are expected to perform better than common stock.

In other words, Burry hasn’t given up on the GSEs’ privatization optionality, but has shifted the seniority of his holdings. Common shares bear the greatest policy uncertainty risk, while preferred shares offer downside protection.

Policy Contradiction: MBS Purchases Conflict with Capital Accumulation

Pulte’s policy orientation is another key background for Mizuho’s rating downgrade.

In January 2026, Trump signed an executive order authorizing the GSEs to purchase up to $200 billion in MBS. Pulte subsequently raised the cap for each GSE from $40 billion to $225 billion. Pulte stated this move “immediately reduced mortgage rates,” with Freddie Mac’s weekly report showing rates indeed fell around 10 basis points to a three-year low of 6.06%.

However, the direct consequence of expanded MBS purchases is capital depletion. According to KBW data, by August 2026, Fannie Mae’s retained portfolio had shrunk from $173.4 billion in July to $172.6 billion. The GSEs are effectively using capital to buy short-term rate declines, which is the opposite of the capital building required for privatization.

The priority for Pulte is clearly housing affordability over privatization. And if capital accumulation continues to slow, the privatization timetable will only be further pushed back.

g-fee Dilemma and Valuation Pressure

PIMCO previously pointed out that merely announcing “no cut to the g-fee” could lower mortgage rates by 5 to 10 basis points; but if the g-fee is fully reduced, rates could actually increase due to higher prepayment risk, requiring MBS investors to demand higher yields as compensation.

This traps the GSEs in a dilemma: raising the g-fee is politically unviable, lowering it is financially imprudent, and maintaining status quo slows capital accumulation. Dolev’s conclusion—“no plan to offset losses by raising the g-fee”—acknowledges this deadlock.

On valuation, KBW has already cut the target price for both entities to $3.50 per share, citing the lower probability of privatization and increased dilution risk. Burry warns Fannie Mae may find support around $3. As of early October, Fannie Mae and Freddie Mac shares were trading at $4.04 and $3.68, respectively, both down more than 60% year to date.

Mizuho’s rating reversal, Burry’s portfolio adjustment, and Pulte’s MBS purchase plan together all point to a reality: Privatization of the GSEs is moving from “when will it happen” to “will it happen at all.” Capital accumulation is a slow variable, while the political window is rapidly closing. KBW analyst Bose George wrote in a September report: “The timeline is tight because the government’s focus will shift to the presidential election starting in 2028.” Before then, the GSEs are likely to remain in a “news drought,” awaiting judgment from the next political cycle.