If you thought the biggest news in the stock market over the past two months was artificial intelligence behemoth Nvidia or Elon Musk’s Tesla, you’d be wrong. The hottest shares on Wall Street are from two companies with stodgy names such as the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation, which are better known as Fannie Mae and Freddie Mac.
The U.S. Congress chartered the two government-sponsored enterprises (GSEs) to buy and guarantee mortgages issued through lenders in the secondary mortgage market. These titans of the industry combine individual mortgages into tradable mortgage-backed securities, allowing for a constant flow of capital. According to the National Association of Realtors, the two support around 70% of U.S. mortgages.
In recent years, stock traders have shown little interest in the shares of these company…until now. Between Nov. 1 and Jan. 13, Fannie Mae’s share value is up more than 300%. From Nov. 4 to Jan. 13, the price of Freddie Mac shares has jumped more than 350%. For the year, Fannie Mae is up about 400% and Freddie Mac is up an amazing 500%.
The reasons for these stock manias are indications that the Trump administration will push to privatize the two companies, which have proven quite profitable. During the 2008 financial crisis, the federal government took over Fannie Mae and Freddie Mack and invested about $191.5 billion to stabilize them. In return, the Treasury acquired senior preferred shares in both entities. According to ProPublica, the companies have not repaid any principal, but they have paid dividends worth $301 billion as of 2022.
Trump tried unsuccessfully to privatize the two mortgage giants during his first term as president. Trump’s Treasury Secretary Steve Mnuchin allowed the entities to retain earning and rebuild capital reserves.
Investors are now betting Trump’s second administration succeed, and in the process, unlock a profit center for shareholders. The Federal Housing Finance Agency, which oversees the two companies, has introduced new capital requirements which may be setting the stage for their potential exit from conservatorship.
Billionaire investor Bill Ackman, who founded Pershing Square Capital Management, and is believed to be a major shareholder in Fannie and Freddie, has been stoking interest in the two stocks by discussing how the Trump administration will privatize the two companies. He estimates that privatizing could earn the federal government $300 billion in profits and remove $8 trillion in liabilities from its balance sheet.
“Trump likes big deals, and this would be the biggest deal in history,” Ackman wrote in a post on X about privatizing Fannie and Freddie. “I am confident he will get it done.”
However, it’s unclear what impact privatization would have on homebuyers and if it could have detrimental effects on the housing industry. Those against the move worry that it could drive up mortgage rates when housing affordability issues are already a major problem for the industry. The move also could reduce support for affordable housing and increase market volatility.