Mizuho downgraded Fannie Mae and Freddie Mac to Neutral from Buy and cut its price targets on both, analyst Dan Dolev said Oct. 12.
Dolev now sees lower odds that the government privatizes the two mortgage giants by 2028.
Rising mortgage rates sit at the center of the downgrade. Higher rates could push the companies to raise guarantee fees, the charge they collect for backstopping mortgages.
The Federal Housing Finance Agency's focus on mortgage acquisition and the return of VantageScore alongside FICO credit scoring add more friction. Together, those forces could make it harder to build the capital a privatization requires.
The trade was always binary
Mizuho started coverage in May with a $10 target for Fannie and $9 for Freddie, assigning a 30% probability to a fast exit for Fannie and 20% for Freddie by 2028.
On the slower path, common shareholders could earn zero through 2033. The firm described both stocks as trading on a single variable, whether Washington resolves the 17-year conservatorship in a way that leaves residual value for common holders.
A fast exit likely requires regulators to set capital standards at 2.5% of risk-weighted assets and to treat the government's senior preferred shares as paid.
Mizuho flagged the tension between the administration's housing policy goals and its privatization goals as the main near-term uncertainty. Analysts broadly expect no public offering before the midterms.
Mizuho is not alone in backing away
BTIG cut both names to Neutral in June, pointing to limited visibility into the timing of any release from conservatorship.
The unresolved pieces are the same ones Mizuho listed, updated capital standards and the government's senior preferred stake.
BTIG said it doesn't view the government-sponsored enterprises as a near-term priority in Washington and expects the shares to stay volatile as expectations shift.
Keefe, Bruyette & Woods rates Freddie underperform, warning of significant downside if privatization fails and significant dilution if it succeeds.
For retail holders, that's the shape of the bet. A successful exit may still mean issuing enough new stock to shrink what existing shareholders own.
With high housing costs under political scrutiny, an exit from conservatorship isn't expected soon.
