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Bill Ackman Thoughts On Fannie Mae And Freddie Mac

Fannie and Freddie’s underlying earnings continue to progress modestly in the core mortgage guarantee business, while the non-core investment portfolio continues to shrink to a smaller and appropriate level, resulting in a more profitable and lower-risk business model. The strength in underlying earnings growth reflects two factors: (1) an increase in guarantee fees as the fees on new mortgages exceed the average fees on the existing portfolio, and (2) lower credit losses as the portfolio’s credit quality has meaningfully improved since the financial crisis.

There were a number of legal developments this quarter. In the Federal Court of Claims case, Judge Sweeney granted the plaintiffs access to 56 documents the government had claimed were privileged, many of which were contemporaneous with the period just prior to the Net Worth Sweep and involved high level government officials. The plaintiffs have not yet had access to the privileged documents as the government has appealed Judge Sweeney’s ruling. We find it interesting that the government is fighting so hard against this ruling, as it has previously complied with the judge’s prior motions to turn over documents.

A new lawsuit was filed in Texas that makes claims similar to the Perry case, but also makes several new arguments. First, the lawsuit argues that the Housing and Economic Recovery Act (HERA), which grants FHFA rights as conservator, is invalid and violates the separation of powers. Second, the lawsuit contends that the FHFA has affected a liquidation of the GSEs in violation of HERA by creating policies such as a common securitization platform and credit risk transfer agreements which are designed to minimize the GSEs role in the marketplace.

Since the election, Fannie and Freddie’s share prices have appreciated materially as investors believe that a more business-oriented administration that did not implement the Net Worth Sweep would be more likely to seek a consensual resolution that benefits all stakeholders. Recent statements by Steven Mnuchin, the presumptive Treasury Secretary, have also contributed to the recent stock price increases. In an interview on Fox Business, Mr. Mnuchin stated:

It makes no sense that [the GSEs] are owned by the government and have been controlled by the government for as long as they have. In many cases this displaces private lending in the mortgage markets and we need these entities that will be safe. So let me just be clear— we’ll make sure that when they’re restructured they’re absolutely safe and they don’t get taken over again. But we gotta get them out of government control.

We strongly agree with Mr. Mnuchin’s views about the GSEs.