Keefe downgrades Fannie, Freddie on dilution risk from privatization

Keefe Bruyette downgraded both Fannie Mae (FNMA) and Freddie Mac (FMCC) to Market Perform from Outperform with increased price targets of $3 and $4, respectively. Government-sponsored enterprise privatization could be on the agenda during the second Trump administration, but it would have to be done under the current Congressional charter, which would maintain the implicit guaranty, the analyst tells investors in a research note. The firm says any change in the charter would require Congressional action, which is “very unlikely, primarily because the status quo is acceptable and could persist indefinitely.” While the odds of GSE reform “crossing the finish line are not high given significant challenges,” there could be an effort in earnest to achieve reform starting in 2025, contends Keefe. The firm downgraded Fannie and Freddie as it believes the dilution risk is significant in the event of privatization. The potential outcomes for the preferred shares could be more favorable since they are not directly exposed to dilution risk, although there could be write-downs, adds Keefe.