BREAKING NEWS: FREDDIE MAC & FANNIE MAE

The US Treasury Department and the Federal Housing Finance Agency have unveiled a plan outlining the steps to end the conservatorship of Fannie Mae and Freddie Mac. This development has led to a surge in the common stock prices of these mortgage giants, marking their highest levels since 2019.

The roadmap released by the Treasury Department and FHFA emphasizes the need for detailed plans to conclude the conservatorship, including public feedback periods and consultations with key stakeholders like the Financial Stability Oversight Council and the US president. This agreement reinstates the Treasury's authority to approve the release of Fannie Mae and Freddie Mac from government oversight, ensuring an orderly transition reflective of existing practices.

Following the 2008 financial crisis, where the government intervened to rescue Fannie Mae and Freddie Mac with approximately $187.5 billion in bailout funds, the Treasury acquired senior preferred shares in both entities. The latest deal maintains the current terms related to capital retention and dividend payments on these senior preferred shares.

Market reactions have been notable, with Freddie Mac's shares rising to $3.96 and Fannie Mae's stock reaching approximately $4.07 in morning trading. The endorsement of hedge fund manager Bill Ackman to invest in the common stock of these entities has further influenced market sentiment positively.

While this new agreement does not preclude potential future administrative actions concerning Fannie and Freddie, it establishes transparent expectations for the cessation of conservatorship. These entities, integral to the US housing market despite not directly originating mortgages, play a crucial role by purchasing loans and packaging them into securities for sale to investors.

Analysts suggest that a complete exit from government-owned or guaranteed Mortgage-Backed Securities (MBS) may be a prospect around 2026-27, indicating a potentially lengthy exit process ahead.