Fannie Mae (“FNMA”, or “Fannie”) and Freddie Mac (“FMCC”, or “Freddie”)(FNMA)(FMCC)
Following a difficult 2018 driven primarily by a lack of progress on housing finance reform, FNMA and FMCC common and preferred shares have rebounded sharply in the first few months of this year as the probability of a favorable resolution to the status of both companies has increased. Favorable recent developments include repeated comments from Treasury Secretary Steven Mnuchin citing GSE reform as a key priority for 2019; the U.S. Treasury, on behalf of the taxpayer, achieving an annualized return on its Senior Preferred Stock investment greater than the originally bargained for 10% rate; Democrats winning control of one branch of Congress in the 2018 midterm elections increasing the odds of administration-led reform, and, new leadership at FHFA, Fannie and Freddie’s primary regulator, with Joseph Otting serving as Acting Director while Mark Calabria awaits Senate confirmation.
While we believe that Congress has an important role to play in housing finance reform efforts, we do not believe that the administration will allow a gridlocked, divided Congress to cause it to miss the window for achieving an end to the current untenable status quo. Completing one of the largest private capital raises in history necessitates favorable economic and financial market conditions like the current environment, with GDP growth at robust levels, unemployment at record lows, and national home prices and stock market indices at or near all-time highs. We believe that 2019 is the optimal time for action, ahead of the next presidential election in 2020, and that Treasury has a unique opportunity to exercise its warrants in Fannie and Freddie and utilize over $150 billion of these profits to fund key government priorities.
FNMA and FMCC common shares declined 60% and 58%, respectively, in 2018, but have since increased 149% and 136% year-to-date in 2019. FNMA and FMCC preferred shares declined 20% and 6% during 2018 and have increased 28% and 26% year-to-date in 2019.
From Bill Ackman (Trades, Portfolio)'s Pershing Square 2018 annual shareholder letter.
