Why The Fate Of Fannie And Freddie Is Tied To Trump's Pick To Head The Treasury

Shares of Federal National Mortgage Assctn Fnni Me FNMA and Federal Home Loan Mortgage Corp FMCC are down more than 3 percent on Thursday following comments by President-elect Donald Trump’s Treasury Secretary nominee Steven Mnuchin.

Mnuchin lit a fire under the two stocks back in November when he addressed the fate of the two government sponsored enterprises.

“We want to make sure that when they are restructured, they are absolutely safe and don’t get taken over again,” he said. “But we’ve got to get them out of government control.”

Fannie And Freddie Volatility

The market took the quote as good news for Fannie and Freddie investors. Both entities are currently under government conservatorship, which requires them to fork over 100 percent of their profits to the Treasury, making common shares essentially worthless. Shareholders have sued, claiming that the terms of the conservatorship are illegal. However, without the help of a favorable court ruling or help from the Trump administration, the “net-worth sweep” will likely remain intact.

Fannie and Freddie bulls were hoping for more clarity on Mnuchin’s plan for the GSE’s during his confirmation hearing on Thursday. However, they have so far been disappointed.

Fannie and Freddie shares initially dipped nearly 10 percent on Thursday when Mnuchin indicated his previous words may have been misconstrued by the market. Mnuchin said he never intended to imply that Fannie and Freddie should be “recapped and released.”

Mnuchin provided no specifics about his intended plan for Fannie and Freddie, although he noted that the plan should be a bipartisan one. He also added that Fannie and Freddie have been well-run in recent years and don’t currently pose a risk to the government. In addition, he believes the two GSEs provide important liquidity for the U.S. housing market.

Trump Team Email

Back in December, Trump’s transition team sent out an email addressing Fannie and Freddie without providing any details about the approach the administration plans to take.

“Government ownership of these entities creates a systemic risk by encouraging and subsidizing risky behavior on Wall Street and distorting market forces,” the email read. “The president-elect and Mr. Mnuchin look forward to working with both parties on reforms that protect taxpayers.”

The “recap and release” comments Mnuchin made on Thursday seem to suggest the administration has no intention of returning the GSEs and their profits back to the open market. However, his additional comments about the necessary liquidity Fannie and Freddie provide suggest winding them down may also be off the table.

That would put Trump and Mnuchin at odds with Republican Financial Services Committee Chairman Jeb Hensarling, who has repeatedly called for Fannie and Freddie to be dismantled and replaced by a private-sector alternative.

Unfortunately for Fannie and Freddie investors, Mnuchin’s commentary on Thursday did very little to advance the story. However, after years of very little progress, the ultimate fate of Fannie and Freddie’s share price now lies firmly in the hands of Trump and Mnuchin.