Fannie Mae and Freddie Mac Shares Surge

Investing.com — Following the recent election, shares of Fannie Mae (OTC:FNMA (ST:FNMA)) and Freddie Mac (OTC:FMCC) have surged, driven by speculation that the Trump administration may attempt to privatize the government-sponsored enterprises (GSEs).

Analyst Insights

Citi analysts weighed in on the likelihood of such a move, saying in an investment research note that Trump previously sought to end the conservatorship of Fannie and Freddie in his first term, but his attempt was cut short by time constraints.

They believe the effort could gain momentum under the new Trump administration backed by a Republican-led Congress, potentially increasing the chances of privatization.

Citi cites former Federal Housing Finance Agency (FHFA) head Mark Calabria, who believes the groundwork laid in 2019 may facilitate a path toward privatization by 2027, though significant hurdles remain.

> Mr. Calabria believes there is little to no chance that privatization occurs in 2025, but by 2027 the chances rise to ~70%,” noted Citi.

Future Considerations

The bank believes a new FHFA Director, particularly someone with pro-privatization views like Calabria, could signal the administration’s commitment to this initiative. However, Citi notes that even if privatization occurs, an explicit government guarantee would likely still be necessary to ensure mortgage-backed securities remain attractive to investors.

Potential Consequences

Citi analysts highlight potential consequences, including increased capital requirements for Fannie and Freddie, which could lead to higher guarantee fees and loan-level pricing adjustments (LLPAs).

They add that higher fees might raise mortgage rates by up to 97 basis points, potentially impacting housing affordability.

> Bottom line: We don’t think GSE privatization is coming soon, and if/when it does, we expect some form of explicit guarantee will be in place. That said, the issue bears watching given the potential for any upwards pressure on mortgage rates, especially in a period of historically low affordability.