Andrew Bary
Shares of Fannie Mae and Freddie Mac have surged lately as investors bet the incoming Trump administration will release the two mortgage giants from government control, resulting in a bonanza for their shareholders.
But the privatization process could be lengthy and difficult with the possibility of higher mortgage rates if the two companies are freed from federal control, according to analysts at DoubleLine, a large investor in the mortgage securities market. Higher mortgage rates could make the whole process politically unpalatable.
"Even if Trump 2.0 is able to end conservatorship, it's hard to see how GSE privatization would lead to lower mortgage rates that benefit the consumer," wrote Kunal Patel and Alex Shvartser of DoubleLine in a new report. DoubleLine is headed by longtime mortgage-backed securities $(MBS)$ investor Jeff Gundlach.
"Further, privatization could carry significant execution risks and could adversely affect the secondary mortgage market, which could drive primary mortgage rates much higher." The DoubleLine analysts wrote that the risk/reward balance is a "tenuous one."
Fannie Mae shares fell 2.4% to $4.36 Monday after hitting a new 52-week high of over $5. Freddie Mac stock lost 2.6% to $4.22 after also topping $5 earlier in the session. Both stocks are up about 75% in the past week and hit new highs of the past 10 years earlier Monday. They had languished between $1 and $2 a share during much of 2024.
The DoubleLine analysts write that a privatization of the pair would need both administrative and legislative action. The legislative part of the equation could prove particularly tough. "Getting Congress, as it is currently composed with a slim Republican majority in both chambers, to agree on legislation related to GSE privatization also seems like a Herculean task," the DoubleLine analysts write.
Mortgage rates already are moving higher along with rising Treasury rates and are approaching 7%. The weekly latest rate tracked by Freddie Mac was 6.91%, the highest level in six months. An end to conservatorship for Fannie Mae and Freddie Mac could mean higher mortgage rates because of a weakening of the government support for the two agencies.
Investors in Fannie Mae and Freddie Mac mortgage securities take comfort in that support and might demand higher rates if it were weakened or removed in a privatization.
That could translate into higher mortgage rates -- possibly a quarter percentage point or more -- at a time when home affordability problems are a big political issue. Members of Congress may be wary of approving privatization legislation that would be a boon to equity investors in Fannie Mae and Freddie Mac but potentially hurt American homebuyers.
Supreme Court decisions in recent years that limit the power of government regulators to act without the consent of Congress could make it difficult to achieve privatization goals without congressional assent.
Wall Street has gotten excited about the possibility that Fannie Mae and Freddie Mac, which are dominant players in the secondary mortgage market, could be removed from conservatorship, where they have been since the 2008-2009 financial crisis, and privatized. That action could be a boon to current shareholders of two companies.
Two developments have encouraged investors. The Biden administration outlined steps last week that it believes should happen before the mortgage giants are set free from government control.
The first Trump administration was favorably disposed to privatization but the efforts didn't lead to any action.
Trump may be poised to attempt to move forward with a release, which company shareholders argue would raise hundreds of billions of dollars for the government. Still, as Barron's wrote last week, ending 16 years of government control is easier said than done.
Release could mean big profits for shareholders, depending on how it is structured. Investor Bill Ackman, a holder of Fannie Mae and Freddie Mac, last week wrote on X that a 2026 public offering could value shares of both companies at $31. That assumes the government retires much of its own equity stake in them.
But there have been several false dawns for Fannie Mae and Freddie Mac privatization over the past decade. The DoubleLine analysis suggests that the current enthusiasm could be too strong given the challenges in achieving that goal.
Write to Andrew Bary at andrew.bary@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 06, 2025 17:10 ET (22:10 GMT)
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