Fannie Mae and Freddie Mac lose shares as Treasury restructuring plan is disappointing

Shares of Fannie Mae and Freddie Mac collapsed on Friday, disappointed by the US Treasury Department's long-awaited plan to begin recapitalizing the mortgage giants and bringing them back to private control after their bailout during the crisis 2008.

Fannie's preferred shares fell 7.9% on Friday early in the afternoon and Freddie Mac lost about 8.8%, on the way to the biggest drop in% of its daily since July 18th.

The plan, released Thursday, set out a series of administrative and legislative recommendations regarding the restructuring of Fannie and Freddie, which guarantee more than half of US mortgage loans and are known as government-sponsored entities.

Investors and analysts said the plan, presented in a 53-page report, left many questions unanswered, failing to provide concrete timelines or a recapitalization plan that many were hoping for.

Isaac Boltansky, director of policy research at Washington-based Compass Point Research & Trading, told Reuters on Friday that his expectations would never be met. While this is an important first step on the long road to restructuring Fannie and Freddie, the report "delivered less than some investors expected," he added.

In March, President Donald Trump urged the Treasury to quickly develop a restructuring plan for Fannie and Freddie, the first major effort to revive housing finance reform after an unsuccessful attempt by the Obama administration in 2012.

Many investors were hopeful that the plan, led by Treasury Secretary Steve Mnuchin, would recommend quick and bold moves to recapitalize Fannie and Freddie, remove them from custody and start generating returns for private shareholders.

While the Treasury holds mandates representing 80% of the common shares of Fannie's and Freddie, as well as first-tier preferred shares, a handful of hedge funds also have stakes in both classes of securities. They lobbied the Trump administration to undertake housing reform, arguing that the Conservative role had allowed the Treasury to illegally seize Fannie and Freddie's profits. Some hedge funds sued the government against the Conservative government.

Hedge fund investors in Fannie and Freddie include William Ackmans of Pershing Square Capital Management, Bruce Berkowitz Fairholme Funds Inc. and Paulson & Co of John Paulson, according to people close to the record. Berkowitz wrote to his shareholders at the end of July, saying: "It is now time for Fannie and Freddie … to keep what is well earned, to recapitalize and leave the conservation regime.

Mr. Ackman, whose fund holds both common and preferred stock, wrote to his investors last month to say that he was "disappointed" by what he saw as a delay in the Treasury plan but that he was optimistic that the priority of the administration was always to end the Conservatives. recapitalize GSEs.

None of the hedge funds were immediately available for comment on Friday, while other investors said they were digesting the plan again. Some analysts and investors were skeptical of Congress's willingness to respond to the Treasury's request for comprehensive housing reform, in the hope that only incremental administrative changes would be made.

"The stock market was clearly disappointed," said another hedge fund manager holding stakes in unidentified companies. "I think the market is generally updating parts of the report that would require legislative approval."

Many investors had hoped that the Treasury would provide a clear recapitalization plan that would allow mortgage companies to start keeping most of their income. In particular, they hoped that the Treasury would recommend ending an agreement, authorized by the preferred share agreements, under which the Treasury transfers the quarterly net profits of Fannie and Freddie to its coffers.

The report, however, only recommends that the government "consider allowing them" to retain more than the $ 3 billion of capital currently authorized, adding that any investment plan will need to be carefully negotiated with the Federal Finance Agency. housing, which oversees the pair.

"On the bearish front, this report does not signal the immediate end of the sweeping of the net worth, it was deliberately distorted with respect to the recapitalization process and left many key questions unanswered," wrote Boltansky in a note on Friday. .

Despite this disappointment, the enthusiasm generated by the administration's willingness to tackle housing finance reform has already paid off for some hedge funds, with Fannie and Freddie's preferred shares increased by about 67% for the year.

Ackman said in August that the gains in securities this year contributed to the solid performance of the Pershing Square Holdings fund, which had gained 54% this year.