Shareholders of Fannie Mae and Freddie Mac have been stuck in purgatory for nearly two decades, desperate for any sign that the U.S. government will make changes allowing them to see the profits of the mortgage-finance giants. U.S. Treasury Secretary Scott Bessent on Tuesday gave them the faintest glimmer of hope.
Shares of Fannie Mae late Tuesday afternoon were up 13.7% to $3.89 while shares of Freddie Mac rose 13.4% to $3.56.
The reason appeared to be an interview that Bessent gave to the 2WAY media platform Tuesday morning. A listener asked Bessent if President Donald Trump would move forward with releasing Fannie and Freddie from government control.
"It's unclear why homeowners or mortgage holders would benefit for a change in the arrangement of the shareholder structure," Bessent said in response. "So whatever we do is going to be guided by making sure that the spread on mortgages, on agency mortgages over the Treasury, does not increase. So that's our North Star, and you know I would imagine that the next year, the year after, we will be tackling the ownership structure."
It's that last statement -- that the government might address the ownership structure of Fannie and Freddie in 2027 or 2028 -- that apparently appealed to shareholders like a cool glass of water in the desert. But the optimism is likely misplaced.
It's worth a brief review of why Fannie and Freddie are stuck in this mess. Fannie and Freddie don't make mortgages but buy them from lenders, wrap them into securities and make guarantees to investors in case of default. That process forms the backbone of the U.S. housing finance system.
The government took over Fannie and Freddie in 2008, eventually injecting them with more than $190 billion in bailout money. In return the government received warrants to acquire nearly 80% of the companies' common shares as well as a new class of "senior" preferred shares.
Though the companies recovered and eventually paid the government more than $300 billion in dividends, the contracts governing the shares and conservatorship never provided a mechanism to retire the senior preferred shares while the government backstop continued. In fact the liquidation preference of the senior preferreds -- what the government would get in a sale or wind-down before other shareholders are paid -- has grown to more than $300 billion.
The government's ownership stake, along with Fannie and Freddie's critical place in the mortgage market, has essentially made ending the conservatorship an intractable problem since the financial crisis ended.
The U.S. Treasury Department doesn't want to make a move that would cause bond holders to doubt the U.S. government's backstop of the mortgage-backed securities market. Politicians don't want to do anything that looks like a "giveaway" of a valuable government asset, and shareholders have faint hope of seeing profits if the U.S. stake isn't somehow reduced.
Bessent's comments on Tuesday, however brief, encapsulate that problem. Treasury secretaries for more than a decade, including Steven Mnuchin during Trump's first term, said they would do something to resolve the conservatorships but ended up running out of time amid competing priorities.
While traders on Tuesday latched on to the idea that Bessent hasn't given up on a restructuring, they apparently paid less heed to his statement that he didn't see how homeowners or mortgage holders would benefit from a change.
"This is a point that we have long argued. It goes to why there is no political upside to ending the conservatorship because at best the housing market will be unchanged," wrote TD Cowen analyst Jaret Seiberg in a research note on Tuesday.
Fannie-Freddie shareholders do have a glimmer of hope, but they should be looking for more concrete signs that the administration is moving toward unwinding or selling some of its stake.
Such moves could include revisiting Fannie and Freddie's capital requirements, which some prominent institutional shareholders have identified as too onerous to support private companies at current mortgage pricing. Any modifications of the contracts governing Fannie and Freddie's conservatorships could also be an indication that Trump is serious about freeing the companies.
The window for such moves opens after the midterm election in November, but if the administration doesn't start laying the groundwork by the middle of next year, investors could, once again, run out of time.
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