Fannie Mae (FNMA) / Freddie Mac (FMCC)
Fannie and Freddie reported modest underlying earnings growth in the first quarter, including improved fundamentals in their core single-family guarantee businesses. After drawing funds from Treasury for the first time since 2012 earlier this year to fund one-time charges related to corporate tax reform, Fannie plans to resume dividend payments to Treasury this quarter while Freddie continues to rebuild its capital towards the $3 billion limit for each entity that became effective at the start of the year. Absent a further change in policy from Treasury and FHFA, we would expect Freddie to resume dividend payments to the Treasury in the third quarter. While increasing the amount of capital each entity is allowed to hold from zero to $3 billion was a step in the right direction, current capital levels are still woefully inadequate in light of their more than $5 trillion of outstanding guarantees and other liabilities.
Despite continued business progress and corporate tax reform which will materially enhance the GSE’s profitability, Fannie and Freddie’s common stock prices have declined about 50% year-to-date. We attribute this decline to investor frustration at the lack of progress on housing finance reform efforts in Congress, which seem to have stalled in the run-up to the midterm elections, and, we believe, forced selling from certain large investment firms that have recently begun to wind down their operations.
Treasury Secretary Steven Mnuchin stated in late April that he would focus on housing finance reform after the elections in early 2019. The administration will soon have the ability to appoint a new director of the FHFA, Fannie and Freddie’s primary regulator, in January. Since Congress has been unable to put forth a viable plan since conservatorship began nearly a decade ago, we believe it is increasingly likely that the administration and FHFA will soon take the lead on housing finance reform. While the exact timing of a resolution is difficult to predict and continued stock price volatility is likely, the per-share intrinsic value of each entity continues to grow along with their core businesses. We continue to believe that Fannie and Freddie offer a highly attractive potential reward relative to risk for the patient investor, particularly at current share prices, near their lowest since we made our investment in 2013.
From Bill Ackman (Trades, Portfolio)'s first-quarter 2018 shareholder letter.
