By Joe Light
Shares of Fannie Mae and Freddie Mac rocketed nearly 30% on Friday after President Joe Biden's administration outlined steps it believes should happen before the mortgage giants are set free from government control.
President Donald Trump appears poised to attempt to move forward with a release, which company shareholders argue would raise hundreds of billions of dollars for the government. Still, ending 16 years of government control is easier said than done.
An agreement unveiled late Thursday between the Federal Housing Finance Agency, which controls Fannie and Freddie, and the outgoing Treasury Department would actually slow the process down. Among other things, the pact would require the FHFA to solicit feedback from market participants on how releasing the companies would affect the mortgage and housing markets. It also requires the president and Treasury to sign off on the companies' release.
Common shares of Fannie Mae rose 27% to $4.37 as of noon on Friday, while shares of Freddie rose 28.5% to $4.33.
Fannie and Freddie's shareholders have fought for more than a decade to end government control of the companies, which began as the mortgage market collapsed in 2008. They include hedge fund manager John Paulson, a major Trump donor, as well as Pershing Square Capital Management's Bill Ackman. During the last Trump administration, the Treasury and FHFA came close to an agreement that would have put the companies on a path to release, which would likely earn shareholders tens of billions of dollars, but essentially ran out of time amid the Covid-19 pandemic.
Now, Fannie and Freddie shareholders are betting that Trump's new Treasury Department and FHFA will be able to finish what their predecessors started. The Trump transition team didn't respond to a request for comment.
Fannie and Freddie don't make mortgages themselves. Instead, they buy them from lenders, package them into securities, and guarantee them against default. The process frees up lenders to make new loans, while investors in their mortgage bonds generally treat them as being nearly as safe as government-guaranteed bonds like Treasuries. The government's backing of the mortgage market has helped to make the 30-year fixed-rate home loan common in the U.S., even though it is a rarity in other countries.
In reality, Thursday's agreement will change little, and there are already indications that the Trump administration will disregard or amend it. Mark Calabria, who headed the FHFA under Trump, on X called the request for a report on release "hypocritical" given that the Biden administration abandoned a previous study on Fannie and Freddie's risks to financial stability. Jonathan McKernan, a former Republican FHFA staff member who now is a director at the Federal Deposit Insurance Corporation, noted that the new agreement can be "easily reversed."
"We view this as political and do not see it as a significant roadblock to recap and release," wrote TD Cowen analyst Jaret Seiberg in a research note on Friday.
Release could mean huge profits for shareholders, depending on how it is structured. Ackman earlier this week posited on X that a 2026 public offering could value shares of both companies at $31. That assumed that the government retires much of its own equity stake in them. Under other scenarios, common shareholders could see their stakes severely diluted.
Though Thursday's changes won't matter much, they do serve as a reminder that Fannie and Freddie's shareholders aren't the only ones with high interest in what happens to the mortgage giants.
Trade groups representing bond investors, mortgage lenders, and the rest of the real estate industry complex for years have warned that some plans for releasing Fannie and Freddie from conservatorship could disrupt the mortgage bond market, potentially leading to higher rates for homeowners.
When and if the Trump administration moves forward with plans for potentially releasing Fannie and Freddie, it's likely those sorts of protestations will also pick up in volume. The new heads of the Treasury Department and FHFA will have to weigh whether those threats are credible and whether to move forward anyway. In the past, that tension -- and the lack of a clear reason to take the risk -- has stymied plans to release the companies.
Write to Joe Light at joe.light@barrons.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
January 03, 2025 13:26 ET (18:26 GMT)
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