AI
Tuesday, October 14, 2025 9:28:41 PM
Fannie Mae Common And Preferreds: The Home Stretch
Oct. 14, 2025 - Joseph Parrish
https://seekingalpha.com/article/4829905-fannie-mae-common-and-preferreds-the-home-stretch
Summary
Federal National Mortgage Association is nearing release from conservatorship,
unlocking value for common shares and preferreds FNMAS and FNMAT;
all rated Buy.
FNMA's book value exceeds $100B, trades at a discount, and offers attractive
risk-reward under $10 despite potential dilution from government warrants.
Preferreds FNMAS and FNMAT offer potential high yields, trade at large discounts
to par, and provide better downside protection versus common shares.
Timing of the "IPO" depends on political factors, but both common and preferreds
present compelling opportunities as the end of conservatorship approaches.
Federal National Mortgage Association's (OTCQB:FNMA) release from conservatorship
approaches. This will finally unlock the value of the common shares, as well as the
preferreds, particularly the Series S, Federal National Mortgage Association PFD 8.25%
SER S (OTCQB:FNMAS) and Series T, Federal National Mortgage Association PFD
8.25% SR T (OTCQB:FNMAT). I am giving all three securities one final Buy rating and
laying out my reasons.
Summary of Previous Theses
When I last wrote, President Trump had been in the process of courting big banks to
underwrite the Fannie Mae "IPO" (obviously, Fannie Mae is already public). In the
intervening months, Trump and his Administration have kept many cards close to
their chest. For example, in a post on X on October 7, FHFA Director Bill Pulte
said the following:
It will be up to the President to decide what, if any shares, he wants to sell in any
type of public offering. He has not made a decision yet, nor has he picked a lead bank.
In September, however, Pulte did provide one point of clarity about
how much would be sold:
I think we're looking at about 5%, and I think it will be very oversubscribed.
Secretary of Commerce Howard Lutnick also indicated that the "IPO" would likely
occur before the end of 2025. There are things on Trump's To-Do List that preempt
it, however. As mentioned earlier in the year and in my previous articles, he wanted
to get the One Big, Beautiful Bill and trade deals settled before acting on this. The
OBBB is passed, but trade tensions flared again as Trump imposed 100% tariffs
on China. Depending on how long this takes (and whether Trump counts this),
the "IPO" could very well occur late in the year.
A new obstacle has also reared itself in the ongoing government shutdown, and
it's unclear if this will affect Trump's timeline.
Timing is one thing. The extent of equity that the federal government will keep with
its warrant is another. I suspect that it will be substantial, in line with his agenda
of creating sovereign wealth. This was seen earlier with the 10% stake in Intel
Corporation (INTC) that he negotiated in August and more recently with Lithium
Americas Corp. (LAC).
A key difference here, however, is that the investing public depends, in large part,
on the implicit guarantee of the federal government for the Agency mortgage-backed
securities. For that reason, while the warrant may not be exercised to its most
dilutive extent, I think one has to consider that it will be enough to maintain a
controlling interest in the company.
If 5% is sold in the "IPO," then an exercise to receive 55.1% of the common
equity seems likely for a base case.
Most Recent Financials
As Q2 2025 results have been reported, we can review updated financials
for the company. First, let's look at the latest book value.
Screenshot
Balance Sheet (Q2 2025 Form 10-Q)
Note that it finally broke $101B in the quarter. Also note the $120.8 senior
preferred stock ("SPS," basically, the federal government's balance from
the 2008 bailout), distinct from the normal preferred stock of $19.1B
(junior preferreds, "JPS"). FNMAS and FNMAT fall into this latter category.
While Fannie Mae doesn't meet regulatory capital ratios with the SPS on
its balance sheet, the government waiving this would eliminate it entirely.
Ending the conservatorship without doing this would almost be a moot point.
Screenshot
Income Statement (Q2 2025 Form 10-Q)
The latest income statement, meanwhile, shows the importance of interest
rate cycles on Fannie Mae's business. Interest income is up year-over-year,
but net income overall is down because interest expense climbed higher.
Screenshot
Q2 2025 Company Presentation
This is despite the fact that their guarantee book isn't any smaller than
it was a few years ago. Interest rate cycles are therefore important.
The conservatorship notwithstanding, an investment in Fannie Mae
today would have been something like an investment in the low cycle.
End of Conservatorship
When I last wrote, President Trump had been in the process of courting
big banks to underwrite the Fannie Mae "IPO" (obviously, Fannie Mae
is already public). In the intervening months, Trump and his Administration
have kept many cards close to their chest. For example, in a post on
X on October 7, FHFA Director Bill Pulte said the following:
It will be up to the President to decide what, if any shares, he wants
to sell in any type of public offering. He has not made a decision yet,
nor has he picked a lead bank.
In September, however, Pulte did provide one point of clarity about
how much would be sold:
I think we're looking at about 5%, and I think it will be very oversubscribed.
Valuations
What exactly is a good Buy price for FNMA then? As I write this,
the market cap is currently about $50B. In a post on Truth Social,
Trump posted an image suggesting a combined valuation of
$1 trillion for both Fannie Mae and Federal Home Loan Mortgage
Corporation (OTCQB:FMCC).
Screenshot
Image From President Trump's Post (Truth Social)
As FMCC currently trades around $35B, this suggests a belief
that FNMA will be worth at least $500B. Whether this points to
an offering price for the 5% stake or a long-term valuation is
difficult to determine. Adjusted for the base case of dilution,
it suggests that FNMA would be at least 4X from a starting
point of about $10.
It's fair to note that the image, full of Trump's trademark pageantry,
may not be the best indicator. The President regularly blurs the
line between his final intentions and his rallying cries, but it is a
specific number, and we can surmise that it represents an upper
end of value as Trump and his officials see it.
This is why I have recommended and continue to recommend a
disciplined Buy price under $10. Trump can pick an "IPO" price,
but the market will set the multiple at which current shareholders
get to exit.
For investors who do not trust the risks of the common, either
because more dilution may occur or because the market multiple
may be too low, the Series S & T preferreds remain an attractive
alternative.
Screenshot
Fannie Mae Securities (2024 Form 10-K)
With FNMAS under $17 and FNMAT under $16, both are substantial
discounts to par of $25. As the highest-coupon issues of the JPS,
they are the most likely to snap to par value at the end of conservatorship.
While it may not be a return of 4X, it doesn't risk dilution and has
better protection in the capitalization. For these reasons,
I maintain my Buy ratings on them as well.
Conclusion
While I suspect the government shutdown will need to end before a
final move is made on Fannie Mae's "IPO," the common retains an
attractive risk-reward asymmetry under $10 and with the opportunity
very close now. The preferreds are also a great alternative for those
seeking more security. This is the last I will write of this Trump trade,
nd I will wait until after it is done before reassessing.
Oct. 14, 2025 - Joseph Parrish
https://seekingalpha.com/article/4829905-fannie-mae-common-and-preferreds-the-home-stretch
Summary
Federal National Mortgage Association is nearing release from conservatorship,
unlocking value for common shares and preferreds FNMAS and FNMAT;
all rated Buy.
FNMA's book value exceeds $100B, trades at a discount, and offers attractive
risk-reward under $10 despite potential dilution from government warrants.
Preferreds FNMAS and FNMAT offer potential high yields, trade at large discounts
to par, and provide better downside protection versus common shares.
Timing of the "IPO" depends on political factors, but both common and preferreds
present compelling opportunities as the end of conservatorship approaches.
Federal National Mortgage Association's (OTCQB:FNMA) release from conservatorship
approaches. This will finally unlock the value of the common shares, as well as the
preferreds, particularly the Series S, Federal National Mortgage Association PFD 8.25%
SER S (OTCQB:FNMAS) and Series T, Federal National Mortgage Association PFD
8.25% SR T (OTCQB:FNMAT). I am giving all three securities one final Buy rating and
laying out my reasons.
Summary of Previous Theses
When I last wrote, President Trump had been in the process of courting big banks to
underwrite the Fannie Mae "IPO" (obviously, Fannie Mae is already public). In the
intervening months, Trump and his Administration have kept many cards close to
their chest. For example, in a post on X on October 7, FHFA Director Bill Pulte
said the following:
It will be up to the President to decide what, if any shares, he wants to sell in any
type of public offering. He has not made a decision yet, nor has he picked a lead bank.
In September, however, Pulte did provide one point of clarity about
how much would be sold:
I think we're looking at about 5%, and I think it will be very oversubscribed.
Secretary of Commerce Howard Lutnick also indicated that the "IPO" would likely
occur before the end of 2025. There are things on Trump's To-Do List that preempt
it, however. As mentioned earlier in the year and in my previous articles, he wanted
to get the One Big, Beautiful Bill and trade deals settled before acting on this. The
OBBB is passed, but trade tensions flared again as Trump imposed 100% tariffs
on China. Depending on how long this takes (and whether Trump counts this),
the "IPO" could very well occur late in the year.
A new obstacle has also reared itself in the ongoing government shutdown, and
it's unclear if this will affect Trump's timeline.
Timing is one thing. The extent of equity that the federal government will keep with
its warrant is another. I suspect that it will be substantial, in line with his agenda
of creating sovereign wealth. This was seen earlier with the 10% stake in Intel
Corporation (INTC) that he negotiated in August and more recently with Lithium
Americas Corp. (LAC).
A key difference here, however, is that the investing public depends, in large part,
on the implicit guarantee of the federal government for the Agency mortgage-backed
securities. For that reason, while the warrant may not be exercised to its most
dilutive extent, I think one has to consider that it will be enough to maintain a
controlling interest in the company.
If 5% is sold in the "IPO," then an exercise to receive 55.1% of the common
equity seems likely for a base case.
Most Recent Financials
As Q2 2025 results have been reported, we can review updated financials
for the company. First, let's look at the latest book value.
Screenshot
Balance Sheet (Q2 2025 Form 10-Q)
Note that it finally broke $101B in the quarter. Also note the $120.8 senior
preferred stock ("SPS," basically, the federal government's balance from
the 2008 bailout), distinct from the normal preferred stock of $19.1B
(junior preferreds, "JPS"). FNMAS and FNMAT fall into this latter category.
While Fannie Mae doesn't meet regulatory capital ratios with the SPS on
its balance sheet, the government waiving this would eliminate it entirely.
Ending the conservatorship without doing this would almost be a moot point.
Screenshot
Income Statement (Q2 2025 Form 10-Q)
The latest income statement, meanwhile, shows the importance of interest
rate cycles on Fannie Mae's business. Interest income is up year-over-year,
but net income overall is down because interest expense climbed higher.
Screenshot
Q2 2025 Company Presentation
This is despite the fact that their guarantee book isn't any smaller than
it was a few years ago. Interest rate cycles are therefore important.
The conservatorship notwithstanding, an investment in Fannie Mae
today would have been something like an investment in the low cycle.
End of Conservatorship
When I last wrote, President Trump had been in the process of courting
big banks to underwrite the Fannie Mae "IPO" (obviously, Fannie Mae
is already public). In the intervening months, Trump and his Administration
have kept many cards close to their chest. For example, in a post on
X on October 7, FHFA Director Bill Pulte said the following:
It will be up to the President to decide what, if any shares, he wants
to sell in any type of public offering. He has not made a decision yet,
nor has he picked a lead bank.
In September, however, Pulte did provide one point of clarity about
how much would be sold:
I think we're looking at about 5%, and I think it will be very oversubscribed.
Valuations
What exactly is a good Buy price for FNMA then? As I write this,
the market cap is currently about $50B. In a post on Truth Social,
Trump posted an image suggesting a combined valuation of
$1 trillion for both Fannie Mae and Federal Home Loan Mortgage
Corporation (OTCQB:FMCC).
Screenshot
Image From President Trump's Post (Truth Social)
As FMCC currently trades around $35B, this suggests a belief
that FNMA will be worth at least $500B. Whether this points to
an offering price for the 5% stake or a long-term valuation is
difficult to determine. Adjusted for the base case of dilution,
it suggests that FNMA would be at least 4X from a starting
point of about $10.
It's fair to note that the image, full of Trump's trademark pageantry,
may not be the best indicator. The President regularly blurs the
line between his final intentions and his rallying cries, but it is a
specific number, and we can surmise that it represents an upper
end of value as Trump and his officials see it.
This is why I have recommended and continue to recommend a
disciplined Buy price under $10. Trump can pick an "IPO" price,
but the market will set the multiple at which current shareholders
get to exit.
For investors who do not trust the risks of the common, either
because more dilution may occur or because the market multiple
may be too low, the Series S & T preferreds remain an attractive
alternative.
Screenshot
Fannie Mae Securities (2024 Form 10-K)
With FNMAS under $17 and FNMAT under $16, both are substantial
discounts to par of $25. As the highest-coupon issues of the JPS,
they are the most likely to snap to par value at the end of conservatorship.
While it may not be a return of 4X, it doesn't risk dilution and has
better protection in the capitalization. For these reasons,
I maintain my Buy ratings on them as well.
Conclusion
While I suspect the government shutdown will need to end before a
final move is made on Fannie Mae's "IPO," the common retains an
attractive risk-reward asymmetry under $10 and with the opportunity
very close now. The preferreds are also a great alternative for those
seeking more security. This is the last I will write of this Trump trade,
nd I will wait until after it is done before reassessing.
