By Shaina Mishkin
Shares of mortgage giants Fannie Mae and Freddie Mac have been on a tear -- and it has nothing to do with home demand, mortgage rates, or new housing policy. Instead, speculation about the companies' future under President Donald Trump is moving the stocks.
Federal Home Loan Mortgage and the Federal National Mortgage Association, better known as Freddie Mac and Fannie Mae, are major players in the U.S. housing market. They buy, securitize, and guarantee home loans that meet certain requirements from lenders, providing liquidity to the mortgage market. More than half of active mortgages as of the fourth quarter were guaranteed by the companies, according to Intercontinental Exchange loan-level mortgage data.
Freddie Mac and Fannie Mae shares rose 143% and 126%, respectively, from the presidential election through Wednesday's close, according to Dow Jones Market Data. That marks the stocks' biggest seven-day gain since 2013. Freddie Mac and Fannie Mae both declined to comment.
Investors are betting that the president-elect will push to remove the companies, commonly referred to as government-sponsored enterprises, or GSEs, from their Federal Housing Finance Agency conservatorship. That could, in turn, resolve their subprime mortgage crisis-era obligation to the Treasury Department.
"People are looking at what happened last time, where they made some efforts to move in that direction," says Bose George, an analyst at Keefe, Bruyette & Woods, noting the changes the Trump administration made to allow the companies to retain capital. "It's a lot easier now to do something than it was under Trump 1.0."
The path to privatization isn't clear, easy, or certain, with multiple potential outcomes. "This is an incredibly complicated and contentious issue with countless stakeholders, lots of moving parts, and a fair amount of bad blood," BTIG Director of Policy Research Isaac Boltansky wrote in a recent note. "There are hurdles on the road, but each of those hurdles can be cleared if there is the political will to move forward."
The companies have been under government conservatorship since 2008, when the Federal Housing Finance Agency, or FHFA, was established by Congress in the wake of the subprime mortgage crisis. Since entering conservatorship, the companies' common stock prices have dwindled from higher than $70 to at times less than a dollar. The FHFA didn't return a request for comment.
The declines have occurred because of the way the stock is structured. The Treasury Department provides the companies with funding through its Senior Preferred Stock Purchase Agreements. The agreement was established a day after the companies entered conservatorship in 2008 as a way to prevent the housing crisis from deepening, and has been amended several times since then.
The agreements provided a path for Fannie and Freddie to keep operating, but routed much of its capital back to the Treasury.
The terms have been amended multiple times since 2008, including changes under the Trump administration to allow the companies to retain earnings. But resolving the senior preferred shares is one of the big remaining hurdles for the companies to operate outside of conservatorship, says BTIG's Boltansky.
If -- and how -- that happens is murky, as is the eventual outcome for investors. There's no agreed-upon plan for removing the companies from conservatorship, nor a guarantee that the incoming administration will make it a priority. A Trump campaign spokesperson didn't respond to a request for comment. Even if the companies exit conservatorship, common shares could be diluted if the Treasury converts their senior preferred to common, says KBW's George.
The near-term drivers of the stocks are much simpler. News or speculation about the administration's plans for the FHFA and Treasury could move the shares. Freddie Mac and Fannie Mae climbed earlier this week as markets weighed potential Treasury Secretary picks.
The shares are "moving [for] the same reason that crypto has moved, and the private prisons, and the banks," says BTIG's Boltansky. "It's all anticipation of what Trump will do."
Write to Shaina Mishkin at shaina.mishkin@dowjones.com
This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
November 14, 2024 14:03 ET (19:03 GMT)
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