Five Months from Initiating with "Buy" to "Neutral": Mizuho Downgrades Fannie and Freddie, Privatization Expectations Cool Rapidly

Mizuho Securities recently downgraded Fannie Mae (FNMA.US) and Freddie Mac (FMCC.US) from "Buy" to "Neutral," halving both price targets: Fannie Mae from $10 to $5, and Freddie Mac from $9 to $4. This comes just five months after Mizuho initiated coverage with a "Buy" rating. Analyst Dan Dolev acknowledged in his research note that the probability of completing privatization of the two GSEs before 2028 is declining. He cut Fannie Mae's privatization probability from 30% to 18%, and Freddie Mac's from 20% to 9%. This shift echoes the moves of "Big Short" investor Michael Burry who has sold common shares of both companies and rotated into preferred stock. Mizuho: Privatization Probability Slashed When Mizuho first initiated coverage of the two GSEs in May, its core thesis was that the market was severely underestimating the probability of an IPO before 2028. At the time, Dolev's "fast exit" scenario included a 2.5% capital requirement, government preferred stock repayment terms, and accelerated capital accumulation through higher guarantee fees (g-fees). But five months later, all three assumptions have weakened. In his latest research note, Dolev lays out three reasons: First, rising mortgage rates make privatization more complicated. If the two GSEs were to raise g-fees to exit government control, it would directly push up mortgage costs highly infeasible in the current politically sensitive environment around housing affordability. Second, FHFA Director Bill Pulte recently indicated that the two GSEs will purchase more mortgage-backed securities (MBS), a move that helps suppress rates in the short term but consumes capital. Third, the addition of VantageScore to the FICO Classic system and the reintroduction of "dual-merge" credit scoring models add complexity to credit risk management. Dolev notes that the first obstacle introduces political complexity to privatization, while the latter two slow the pace of capital accumulation. He expects the two GSEs will not offset losses by raising g-fees, capital accumulation will be slower, and the timeline for full capitalization will be pushed further out. Burry Sells Common Stock, Buys Preferred In a Substack post over the weekend, Burry disclosed that he has liquidated his common stock holdings in both GSEs and shifted into multiple series of junior preferred stock. His core judgment: the U.S. Treasury holds $388 billion in senior preferred stock, and if converted to common equity, existing common shareholders face at least 90% dilution. But Burry is not bearish on the two GSEs themselves. He points out that Fannie Mae's junior preferred stock currently has a market value of about $6 billion against a par value of $19 billion, trading at roughly a quarter of par. If dividends are restored or the shares convert at par, the expected return would be roughly 3 to 5 times. In the capital structure, preferred stock ranks ahead of common stock in both dividend distribution and liquidation priority even if the Treasury converts its stake, preferred stock would outperform common. In other words, Burry hasn't abandoned the privatization option on the two GSEs he's adjusted his position in the capital stack. Common stock bears the greatest policy uncertainty risk, while preferred stock offers downside protection. Policy Contradiction: MBS Purchases Conflict with Capital Accumulation Pulte's policy stance is another key backdrop to Mizuho's downgrade. In January 2026, Trump signed an executive order authorizing the two GSEs to purchase up to $200 billion in MBS. Pulte subsequently raised the holding cap for each from $40 billion to $225 billion. Pulte called the move a "immediate reduction in mortgage rates," and Freddie Mac's weekly survey showed mortgage rates did indeed fall about 10 basis points to 6.06%, a three-year low. But the direct consequence of expanded MBS purchases is capital consumption. KBW data shows that as of August 2026, Fannie Mae's retained portfolio had shrunk from $173.4 billion in July to $172.6 billion. The two GSEs are trading capital for short-term rate relief the opposite direction from the capital accumulation needed for privatization. Is Pulte's priority housing affordability or privatization? Based on actions, the former clearly prevails. And if capital accumulation continues to slow, the privatization timeline will only be pushed further out. The g-fee Dilemma and Valuation Pressure PIMCO previously analyzed that merely announcing "no g-fee cuts" could lower mortgage rates by 5 to 10 basis points; but a full g-fee cut could actually push rates higher, because it would increase prepayment risk and MBS investors would demand higher yields as compensation. This puts the two GSEs in a bind: raising g-fees is politically unfeasible, cutting g-fees is financially unfavorable, and maintaining the status quo means slow capital accumulation. Dolev's judgment "will not offset losses by raising g-fees" effectively acknowledges this dilemma. On valuation, KBW has already cut its price target for both GSEs to $3.50 per share, citing the combination of declining privatization probability and dilution risk. Burry warns that Fannie Mae could fall to around $3 to find support. 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 position adjustment, and Pulte's MBS purchase plan all point to one reality: privatization of the two GSEs is degenerating from "when will it happen" to "will it happen at all." Capital accumulation is a slow variable, while the political window is narrowing. KBW analyst Bose George wrote in a September report: "The timeline is narrow because the administration's attention will shift to the presidential election starting in 2028." Until then, the two GSEs are more likely to remain in a "news desert," waiting for the verdict of the next political cycle.