Fannie Mae and Freddie Mac are the bedrock under America’s housing finance system. For the last 17 years, they have been in federal government conservatorship. These government-sponsored enterprises (GSEs) play an indispensable role in the health of our nation’s mortgage markets by guaranteeing over half of American mortgages. In recent months, as they approach the company’s anticipated public offering, these investors have made headlines for provoking the ire of lawmakers.
Bill Ackman, founder and CEO of Pershing Square Capital Management. As a result, he has emerged as perhaps the largest and certainly the most aggressive–vocal too. His investment joins other notable investments from Carl Icahn and John Paulson. Just as their stock prices have ballooned spectacularly over the past year. They’ve spiked almost 500% for Fannie Mae and about 400% for Freddie Mac—catching the eyes of hedge funds interested in banking a quick profit from a possible spin-off.
The Landscape of Conservatorship
Ever since FHFA put Fannie Mae and Freddie Mac into conservatorship in 2008 amid the financial crisis, they’ve been on a financial leash. Along the way, they have returned an astonishing $301 billion in dividends to the U.S. Treasury. This setup has given these government-backed entities billions of dollars in capital to pump into the federal government and the housing market.
Despite their contributions, the Trump administration’s efforts to take Fannie Mae and Freddie Mac public have attracted scrutiny from Senate Democrats. Most recently, they sent a letter to new FHFA director William Pulte, urging him to stop such initiatives in their tracks. Our letter raised alarm over his plan to prioritize Wall Street investor profits above the housing needs of millions of Americans.
“We have serious concerns that you plan to make significant changes to the Enterprises in a way that would put investor profits over the homes of millions of Americans” – Senate Democrats.
The unprecedented profitability of Fannie Mae and Freddie Mac since entering conservatorship has raised the question of what to do with the two government sponsored enterprises (GSEs). Some investors think that there is one last chance to cash out with a possible IPO. Others caution against making the same mistakes that led to the collapse in 2008.
Divergent Opinions on Public Offering
Lori Goodman, the Urban Institute’s housing finance expert and senior fellow, has publicly expressed doubts about going ahead with a plan to IPO Fannie Mae and Freddie Mac. She argues that tampering with the government guarantee could destabilize a trillion-dollar mortgage-backed securities market that relies heavily on these entities.
“You can’t tamper with the government guarantee without upsetting that huge market” – Goodman.
Norbert Michel, formerly the director of the Heritage Foundation’s Center for Data Analysis. I would agree with similar sentiments and echo the warning that would come with a public offering. He explained how the accumulation of privatized profits and socialized losses underlay today’s financial crisis.
“That was a bad system. We should not have that system” – Norbert Michel.
Michel warned against the dangers of throwing Fannie Mae and Freddie Mac back to the wolves. Without strong protections in place, this change could do far more harm than good.
“Under no circumstances should they be released as they were prior” – Norbert Michel.
Hedge Fund Interests and Market Response
Ackman continues to believe in Fannie Mae and Freddie Mac’s future greatness. He claims that shareholders are not looking for welfare, but for a reasonable return on their investment.
“(Fannie and Freddie) shareholders don’t have their hands out. The opposite is the case” – Bill Ackman.
That’s because the recent wave of stock-price appreciation reflects a growing sense among public-market investors that an IPO is likely now sooner than later. This optimism is already being tested. Political uncertainties and regulatory hurdles may further delay, derail, or transform the spin-off’s plans.
President Donald Trump has laid out his intentions for Fannie Mae and Freddie Mac pretty explicitly. He reassures stakeholders that he’s going to lead them to go public while protecting the U.S. government’s implicit guarantees.
“I am working on TAKING THESE AMAZING COMPANIES PUBLIC, but I want to be clear, the U.S. Government will keep its implicit GUARANTEES, and I will stay strong in my position on overseeing them as President” – Donald Trump.
Even after the announcement, investors are still split on whether a public offering is the best step forward. Some hedge funds are wagering on the good news, but others are urging caution to avoid making history rhyme.