The highs Fannie Mae’s and Freddie Mac’s stocks experienced toward the end last year didn’t stay long after Trump’s Treasury Secretary nominee Steven Mnuchin retreated from his original stance on privatizing the government-sponsored entities during his confirmation hearing.
During his confirmation hearing on Thursday, Sen. Mark Warner, D-Virginia, who pushed for housing finance reform in recent years with Sen. Bob Corker, R-Tenn, asked Mnuchin if he supports the recap and release of Fannie and Freddie.
Shortly after getting selected to be the next Treasury secretary, Mnuchin said during an interview on Fox Business that “getting Fannie and Freddie out of government ownership” is one of the Trump administration’s top 10 priorities.
Mnuchin said at the time that Trump administration plans to reform the government-sponsored enterprises and then “get them out of government control.”
It was unclear if that simply meant an end to Fannie and Freddie’s conservatorship, returning them to their pre-bailout status, or a true privatization of the GSEs, meaning that the government would no longer provide an implicit guarantee to the mortgages Fannie and Freddie securitize.
Either way, the change to Fannie and Freddie’s status sent the GSEs stocks soaring, with each stock closing more than 45% above their opening price at the end of November 2016.
However, Mnuchin further expanded on this original talk during his hearing, backing away on his original comments.
“My comments were never that there should be recap and release,” Mnuchin said. “For long periods of time, Fannie and Freddie were well run and did not create risk to the government. I believe there are very important entities.”
That doesn’t mean that Fannie and Freddie should be left to their own devices, Mnuchin said during the hearing.
But Mnuchin also said that the status quo of the housing finance system is unsustainable.
“We need housing reform,” Mnuchin said. “We shouldn’t leave Fannie and Freddie alone for the next four or eight years without reform.”
While Mnuchin did not provide specifics for how the Trump administration will seek housing finance reform, Mnuchin said he plans to do it with involvement from both parties.
The explanation was enough to send shares of Fannie’s and Freddie’s stock tumbling from the surge in November.
Click the chart below to see a view of Fannie Mae’s stock over the last six months.
Click to enlarge
(Source: Yahoo Finance)
Click the chart below to see a view of Freddie Mac’s stock over the last six months.
Click to enlarge
(Source: Yahoo Finance)
As the GSEs are currently structured, the government owns the senior preferred stock in each, with the junior shares still trading on the over-the-counter market.
If Trump pursues GSE reform in some form or fashion, the junior shareholders could cash in big-time, especially those that bought Fannie and Freddie when they were at their lowest, somewhere in the neighborhood of $0.20 per share in 2010.
Mnuchin comments are not to be taken lightly. Jim Vogel, an FTN Financial strategist, stated in a report that Mnuchin, if approved, would have considerable administrative influence over the GSEs via Treasury’s 2008 support agreement.
Vogel noted two different paths that Mnuchin’s approacj toward GSE reform could take.
“The Administration’s challenge is that its purview is over Fannie and Freddie, not new entities that could stand clear of the GSE legacy,” he said.
As a result, Vogel explained that a fix that keeps Fannie and Freddie alive as a descendant of the current companies runs the risk of perpetuating the old system in the minds of DC policy makers and the parts of the public that still might actually care.
“In other words, Mnuchin’s easiest approach is littered with political land mines,” he said. “The difficult approach – legislation – likely will need to be bipartisan, and Senate Democrats have zero interest in cooperating to reform housing finance without crystal clear protections for homeowners. Those are great, but they come with a higher cost than built into the existing infrastructure.”