FREJN - Freddie Mac: Potential Freedom In 2025, But Multifamily Risks Loom

2025-01-02 14:43:04 ET

Summary

• Fannie Mae and Federal Home Loan Mortgage Corporation aka Freddie Mac stand to benefit significantly from Trump's administration as his allies push for quick release from conservatorship.
• If it remains politically and regulatory feasible, the government may sell Fannie Mae and Freddie Mac over the next two years.
• Assuming its net income remains near current levels, accounting for estimated preferred dividends, I estimate FMCC's EPS potential is around $1-$2 if released, giving it immense dividend potential.
• FMCC's discount potential is offset by significant risks from rising multifamily loan delinquencies, which I expect to accelerate with lower rents and higher borrowing costs.
• FMCC has value potential, but its business model may become obsolete with the rise of AI-powered non-GSE loans.

Federal National Mortgage Association ( FNMA ) aka Fannie Mae and Federal Home Loan Mortgage Corporation ( FMCC ) aka Freddie Mac are among the most significant potential benefactors of Donald Trump's incoming administration. In the June article , “Fannie Mae: An Indirect Bet On Trump Polling Numbers,” I described the correlation between Trump's polling numbers and FNMA's value. Historically, Trump has supported releasing FNMA and FMCC from government conservatorship. Based on the valuations of those stocks, their potential upside is potentially huge, particularly as their book values should become positive around 2027. My bullish outlook had more to do with its valuation and long-term prospects than the election results; however, that obviously is the most significant factor influencing its immediate value.

FNMA is up 126% since the June article, buoyed by Trump's election result and Bill Ackman's call that they have an asymmetric upside from this potential. That said, I do not see FNMA or FMCC as necessarily riskless bets. As I warned, there are growing signs that home prices may soon fall (or not rise with inflation) due to rising inventories. I believe that creates some risk in residential mortgages created post-2022, but it is still far less of a concern than in the late 2000s. However, there are issues in commercial mortgages due to sharply rising delinquency levels. ...

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