Fannie Mae, Freddie Mac shares rebound on Ackman statement

Government-sponsored enterprise stocks staged a recovery in the wake of a social media post from an influential figure on Wall Street who holds shares.

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Billionaire and legacy GSE investor Bill Ackman’s X post on Sunday indicating the stocks were “stupidly cheap” gave a notable lift to both companies.

Fannie’s stock price jumped from around $4.59 on Friday to above $8 before falling back to $7.91 at deadline Tuesday. Freddie’s had leapt from $4.27 to above $7 before retreating to $6.97. Fannie’s trading range for the year has been between $3.60 and $15.99. Freddie’s has been between $3.40 and $14.99.

Ackman, whow has been pushing for an uplisting of the GSEs’ stock, opined in his post that Fannie and Freddie’s could generate 10 times their current prices and “it could happen soon.” Ackman’s investment company, Pershing Square Capital Management, may go public.

Analysts’ average price targets have been more subdued at $12.90 for Fannie and $16.25 for Freddie as of Tuesday morning, according to S&P Capital IQ. Fannie’s consensus recommendation was a 2 or a little below on a scale where 1 is a buy and 5 is a sell. Freddie’s was 1.75.

Freddie’s price target has generally come in ahead of Fannie’s because “FMCC will generate common equity faster than FNMA and have to generate less of it on a relative basis,” according to a recent report by Henry Coffey and Michael Piccolo, who are analysts at Wedbush.

Coffey, Piccolo and some others have warned that a secondary share offering the Trump administration considered last year appears to be backburnered until at least after the midterms. 

Policy priorities appear to have shifted to GSE mortgage-backed securities purchases that appear to have contributed to portfolio growth. These are aimed at lowering or stabilizing rates as inflationary pressure associated with the Iran conflict has put upward pressure on them.

While analysts at Wedbush and some other companies have estimated that rebuilding sufficient capital for the GSEs under current standards could take several years, others have indicated there is a shorter path to this goal.

Lowering minimum standards and using a 2018 proposal as a basis for change could make rebuilding capital “relatively straightforward,” former Freddie Mac CEO Donald Layton wrote in a recent New York University Furman Center report. He is a senior fellow from practice there.

There is considerable debate over what capital standards might be appropriate for the GSEs and different directors for the Federal Housing Finance Agency that oversees them have taken disparate views on this. 

The enterprises’ current regulatory capital framework and small government advocates who spoke on a recent American Enterprise Institute panel would like to see the GSEs, which went into government conservatorship during a national financial crisis, build much higher levels of capital.

The enterprises have been consistently profitable for many years and both the first and second Trump administrations have shown interest in taking steps to remove them from conservatorship, albeit in different ways.

From an investor perspective, one of the questions that could play into what appropriate capital levels should be could depend on whether the enterprises are viewed as more bank-like or similar to insurers.

Fannie and Freddie buy and securitize many loans that US lenders originate and have backed them with what’s been called an implicit government guarantee, which the conservatorships tested.