On the last trading day of 2024, shares of Fannie Mae and Freddie Mac surged between 20% and 30% as 2024 ended, catalysed by a provocative tweet from hedge fund manager Bill Ackman.
Known for his candid insights, Ackman shared a bullish case revolving around his conviction that the new administration will end the receivership of the government-sponsored enterprises (GSEs), sparking fresh investor enthusiasm.
“We have owned Fannie Mae and Freddie Mac common stock for more than a decade… What makes them particularly interesting today… is that there is a credible path for their removal from conservatorship in the relatively short term,” Ackman tweeted, outlining his expectations for their release by 2026 under a second Trump administration.
Ackman’s detailed thread went beyond providing a roadmap for how the GSEs could emerge from government control. He highlighted their robust capital accumulation, potential profitability for the Treasury, and a framework for meeting stringent capital requirements. His analysis suggested a significant upside, projecting a collective valuation of ~US$34 per share at a possible IPO in late 2026.
His timing proved prescient: Just days into the new year, the US Department of the Treasury and the Federal Housing Finance Agency (FHFA) announced amendments to the Preferred Stock Purchase Agreements (PSPAs) for Fannie Mae and Freddie Mac, marking a step toward their eventual release from receivership. The updated agreement restores the US Treasury’s consent rights for any release of the GSEs, ensuring an orderly process. It also requires the FHFA to ask for public input on the potential impacts of conservatorship termination, increasing transparency and stakeholder engagement. Furthermore, the FHFA will assess market and housing implications before making recommendations to the Treasury, which will consult the President before approving it. Other technical updates clarify capital frameworks and operational definitions but leave capital retention and senior preferred dividend terms unchanged. While the end of Treasury’s common stock warrants remains unaltered, extensions are predicted to prevent any disruptive exit from conservatorship.
Details of the announcement can be read here: https://home.treasury.gov/system/files/136/letter-agreements-and-side-letter-executed-by-ust-and-fhfa.pdf
History of the receivership:
Fannie Mae and Freddie Mac’s journey into receivership started during the global financial crisis of 2008. Tasked with ensuring liquidity in the mortgage market, the GSEs were caught in a storm of declining housing prices and mounting defaults. In September 2008, the federal government stepped in, placing the entities into conservatorship under the FHFA to stabilise the housing market and protect taxpayers.
According to the Congressional Budget Office, Fannie and Freddie have paid the Treasury US$301 billion in dividends as of 31 December 2019, significantly exceeding the US$191 billion in bailout funds they received. Despite their profitability, a perpetual state of government control has left shareholders in limbo, awaiting clarity on the entities’ long-term future.
Efforts to release the GSEs gained momentum while Steven Mnuchin was secretary of the Treasury but plans to recapitalise and privatise them were left unfinished. The Biden administration largely maintained the status quo, focusing on affordable housing initiatives rather than structural reforms. Ackman’s renewed focus – and the Treasury’s latest statement – may signal a turning point. It is thought that such plans might be rekindled into action with the incoming administration.
Implications for the Housing Market
While investors weigh the potential returns of a post-conservatorship Fannie and Freddie, broader economic questions loom. Mortgage rates are still near their post-GFC highs with the average 30-year fixed rate now at 6.91%, having gained more than 90 basis points (bps) since the US Federal Reserve started cutting short-term rates further in September 2024. Elevated rates dampen housing demand and affordability, potentially challenging the GSEs’ ability to grow their portfolios.
Would privatisation drive further innovation and efficiency in mortgage financing, or could it lead to higher costs for borrowers? These are critical questions as policymakers evaluate the path forward.
For now, optimism reigns among investors with the share price of both government-sponsored companies gaining further. Yet, the road to reform is fraught with complexity. The stakes are high – not just for Fannie and Freddie Mac but for the broader housing market and millions of American homeowners. Bill Ackman will be presenting a detailed investment thesis on the 15th of January.
©Markets Media Europe 2024
