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(Bloomberg) -- A proposal by President Donald Trump to privatize Fannie Mae and Freddie Mac after almost two decades under government control has the mortgage companies’ stock prices leaping to their highest levels in 16 years.
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Shares of Fannie soared 51% for their strongest performance since August 2009, while Freddie jumped 42% for its best day since September 2019. Both stocks saw very heavy volume, pushing them higher than they’ve been since the housing crash in 2008.
While investors are enthusiastic about the plan, it will be tricky to pull off. Trump floated the idea in his first term, with Treasury Secretary Steven Mnuchin taking the lead, but ran into resistance over fears that any move to change their status as government-sponsored enterprises, or GSEs, would disrupt the mortgage market.
What’s more any move like this could require Congressional approval, something the current administration hasn’t had to secure for the bulk of it’s policies, which have been enacted via executive order.
“We do not see this as a change in policy,” TD Cowen analyst Jaret Seiberg said. “The president has previously endorsed ending the conservatorships of Fannie Mae and Freddie Mac including in his first term. Despite those prior comments, the GSEs remain in conservatorship.”
Taxpayers Rescue
US taxpayers rescued Fannie and Freddie from failure in 2008 with a $191 billion bailout to cover the debt burdens they couldn’t meet. The fear was their collapse would trigger a national housing meltdown. Since then, they’ve been required to send the bulk of their profits to the government, but their shares have continued to trade.
“There’s a very active market of people attempting to capitalize on the news flow,” Bloomberg Intelligence analyst Ben Elliott said. “While institutional investors understand the mechanics and hurdles that need to be overcome, many retail investors who invest in the common shares don’t understand the potential risks of a diluted recapitalization structure.”
Several advocates, including Pershing Square Capital Management’s Bill Ackman, have called for the government to release the entities back to public markets. But there are still many unknowns about what an end of government ownership would look like and what it means for shareholders, who own just 20% of the the companies.