Fannie-Freddie Soar on FHFA Chief's Conservatorship Comment

(Bloomberg) -- Fannie Mae and Freddie Mac shares soared Friday amid fresh reports that the Trump Administration is working on proposal that would recommend freeing the mortgage-finance giants from government control.

Joseph Otting, acting director of the Federal Housing Finance Agency, commented on the administration’s plans at an internal gathering to introduce himself to staff and establish open lines of communication, an FHFA spokesperson said in a statement. MarketWatch reported on the meeting earlier Friday.

Otting mentioned, as he previously has, that the Treasury Department and the White House are expected to release a broad plan for housing that will include details about reform and will likely include a recommendation for ending Fannie and Freddie conservatorships, the FHFA spokesperson said. Treasury Secretary Steven Mnuchin has said that the Trump administration wants to end government control of the companies, and Otting intends to work to advance that plan, the spokesperson said.

Shares of Fannie rose more than 31 percent to $2.37 and Freddie Mac climbed 24 percent to $2.25 at 2:05 p.m. in New York. The increases were the biggest since November 30, 2016, when then-Treasury Secretary nominee Mnuchin first said getting the companies out of the government’s grip was a priority.

GSE Investors

Investors in the two companies, which have been under U.S. control since the 2008 financial crisis, have been optimistic that President Donald Trump’s appointees at Treasury and FHFA will allow them to reap a windfall by ending the conservatorship. Hedge funds, including Paulson & Co. and Bill Ackman’s Pershing Square Capital Management, are among the companies’ biggest shareholders.

Fannie and Freddie don’t lend. Instead, they underpin the mortgage market by buying loans from banks, packaging them into securities and making guarantees to investors in case borrowers default.

The statement by Otting, who is serving as interim FHFA director in addition to heading the Office of the Comptroller of the Currency, corroborates earlier reports that the administration is working on a plan. Still, the FHFA spokesperson didn’t offer details on what might be included in any proposal, such as whether Treasury would call for releasing the companies without Congress passing legislation.

Mnuchin has long promised to deal with Fannie and Freddie but two years into the Trump administration he has yet to outline specific steps he wants to take. That’s prompted many lobbyists and housing-policy analysts to question whether there’s an urgency to take bold measures.

Questionable Upside

Walt Schmidt, head of mortgage-backed securities research at FTN Financial, said he’s skeptical the White House would want to mess with U.S. housing policy with Trump gearing up for a re-election campaign. Any plan could be received poorly, underscoring the fact that the issue poses political risks with uncertain upside.

"The whole GSE system and conservatorship is fairly intractable because of the political ramifications around housing,” Schmidt said. “I don’t know why the administration would want to upset one of the pillars of our economy so significantly going into the next presidential election."

Still, Bloomberg reported last month that Treasury officials have begun discussing whether to pursue a housing-finance overhaul that would bypass Congress because they are losing patience with lawmakers, who’ve failed for more than a decade to come up with a fix for Fannie and Freddie.

In private meetings, Treasury Counselor Craig Phillips has expressed interest in letting Fannie and Freddie build up capital buffers and then ending the conservatorships, Bloomberg reported, citing people familiar with the matter.

Watt’s Departure

Having Otting in place would be key to the Trump administration going around Congress because both Treasury and the FHFA have to agree on any plan to release Fannie and Freddie. Before Otting took over the FHFA earlier this month, the companies’ regulator was run by Mel Watt, a Democratic holdover from the Obama administration. Watt opposed acting without legislation.

Trump has nominated libertarian economist Mark Calabria, who now works for Vice President Mike Pence, to be the permanent director of the FHFA.

--With assistance from Claire Boston.

To contact the reporter on this story: Elizabeth Dexheimer in Washington at edexheimer@bloomberg.net

To contact the editors responsible for this story: Jesse Westbrook at jwestbrook1@bloomberg.net, Gregory Mott

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