FREJN - Inflation Housing Crisis And GSE Conservatorship: A Path Forward

2024-02-17 00:47:18 ET

Summary

• Rising home prices, inflation concerns, and housing shortages highlight the urgency for GSE reform, aligning with proposed solutions from Democratic housing experts.
• White House signals, including statements from key officials like Brian Deese and Lael Brainard, indicate a growing focus on housing policy, potentially paving the way for GSE recapitalization and release.
• Fannie Mae and Freddie Mac remain in conservatorship since 2019, with recent efforts focused on their responsible exit. Legal battles and political shifts suggest a potential path toward release.

Fannie Mae (FNMA) and Freddie Mac (FMCC) are two companies in conservatorship retaining their earnings since September 2019 on their path out of conservatorship. Combined they now have over $125B in net worth which is an all-time record high. Since the companies have begun retaining earnings, the FHFA has been diligently preparing them to responsibly exit conservatorship. Over the years, numerous lawsuits have challenged the government's actions during conservatorship. In August of last year, a jury decided that the government acted in bad faith when arranging the net worth sweep. Since then, prior Democratic White House housing officials have come out separately saying that the conservatorship should end as well as how they would allocate $90B to solve the nation's affordable housing crisis. In fact, the CEO of Fannie Mae came out associating ending the conservatorship with a victory lap .

Investment Thesis

The litigation so far and the pending litigation has not and probably will not result in the legal system forcing the government to release Fannie Mae and Freddie Mac from conservatorship. The Trump administration came up 6 months to a year too short from being able to restructure and effectuate an equity offering. While I believe that it is true that if Trump becomes president again, releasing Fannie and Freddie from conservatorship is a sure thing, I think that the politics are concurrently heating up to drive Biden admin action. Further, I believe the steps the Biden administration has taken to prepare the companies to exit conservatorship points to where things are headed despite the administration not explicitly prioritizing resolving the conservatorships....

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