Mizuho Securities has 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 for the two mortgage giants before 2028 is declining.
He cut the privatization probability for Fannie Mae from 30% to 18%, and for Freddie Mac 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 Odds Slashed Sharply
When Mizuho first initiated coverage on the two companies in May, the core thesis was that the market severely underestimated 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 loosened.
Dolev laid out three reasons in his latest research note.
First, rising mortgage rates make privatization more complicated.
If Fannie and Freddie were to raise g-fees to exit government control, it would directly push up mortgage costs, which is highly unfeasible in the current politically sensitive environment around housing affordability.
Second, Federal Housing Finance Agency (FHFA) Director Bill Pulte recently stated that the two companies will purchase more mortgage-backed securities (MBS), a move that helps suppress rates in the short term but consumes capital.
Third, VantageScore's addition to the FICO Classic system and the reintroduction of "dual-merge" credit scoring models have increased the complexity of credit risk management.
Dolev noted that the first obstacle introduces political complexity to privatization, while the latter two slow the pace of capital accumulation.
He expects the two companies 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 cleared out his common stock positions in both companies and shifted into multiple series of junior preferred shares.
His core judgment: the U.S. Treasury holds $388 billion in senior preferred stock, and if converted to common shares, existing common shareholders would face at least 90% dilution.
But Burry is not bearish on the two companies themselves.
He pointed out that Fannie Mae's junior preferred stock currently has a market value of about $6 billion against a face value of $19 billion, trading at roughly a quarter of par.
If dividends are restored or the shares convert at par, expected returns 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, so even if the Treasury converts its holdings, preferred stock would outperform common stock.
In other words, Burry has not abandoned the privatization option on the two companies but has adjusted his position in the capital stack.
Common stock bears the greatest policy uncertainty risk, while preferred stock provides downside protection.
Policy Contradiction: MBS Buying Conflicts 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 companies to purchase up to $200 billion in MBS.
Pulte subsequently raised each company's holding cap from $40 billion to $225 billion.
Pulte said the move "immediately lowered mortgage rates," and Freddie Mac's weekly report 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 companies are trading capital for short-term rate relief, the opposite direction of the capital accumulation needed for privatization.
Is Pulte's priority housing affordability or privatization?
Based on actions, the former clearly has the upper hand.
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 noted in its analysis that merely announcing "no g-fee cuts" could lower mortgage rates by 5 to 10 basis points; but fully cutting g-fees could actually push rates higher, because it would increase prepayment risk and MBS investors would demand higher yields as compensation.
This leaves the two companies in a bind: raising g-fees is politically unworkable, lowering g-fees is financially unfavorable, and maintaining the status quo means slow capital accumulation.
Dolev's judgment that the companies "will not offset losses by raising g-fees" effectively acknowledges this dilemma.
On valuation, KBW has already cut its price target on both companies to $3.50 per share, citing the combination of lower privatization odds and dilution risk.
Burry has warned that Fannie Mae could fall to around $3 in search of 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 companies 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 government's attention will shift to the presidential election starting in 2028."
Until then, the two companies are more likely to remain in a "news desert," waiting for the verdict of the next political cycle.