Freddie Mac and Federal National Mortgage Association surged 29%, reaching a five-year high, and are expected to bid farewell to the era of government conservatorship!

The U.S. Department of the Treasury and the Federal Housing Finance Agency (FHFA) released new guidelines on Thursday, reassigning the Treasury the final approval authority to terminate the conservatorship of the two "government-sponsored enterprises" (GSEs), Fannie Mae and Freddie Mac. In the future, if Fannie Mae and Freddie Mac prepare to exit government conservatorship, the Treasury must first review and approve the process.

This move aims to ensure that the end of conservatorship can proceed "in an orderly manner," as the government hopes to ensure that the operations of the GSEs do not suddenly lose oversight and regulation, thereby posing risks to the financial or housing markets.

Freddie Mac and Fannie Mae are pillars of the U.S. housing mortgage market. Although they do not directly provide mortgages to homebuyers, they support the U.S. housing market by purchasing loans and packaging them into securities sold to investors.

When the financial crisis erupted in 2008, Fannie Mae and Freddie Mac faced the risk of bankruptcy due to financial difficulties. To prevent the collapse of these two companies from triggering a crash in the U.S. housing market, the U.S. government decided to take them over and provided approximately $187.5 billion in financial assistance.

This funding not only helped Fannie Mae and Freddie Mac weather the crisis but also, as a condition of the bailout, allowed the government to acquire preferred shares in these two companies, granting the Treasury priority in dividends and asset distribution. Since then, Fannie Mae and Freddie Mac have been in a "conservatorship" state, with direct government intervention and management of their operations, while also limiting their independence. Ending the conservatorship would allow them to operate independently again and restore market operations.

On Friday, both Fannie Mae (FNMA) and Freddie Mac (FMCC) saw their stock prices rise over 29% during trading, reaching a five-year high.

"The Two GSEs" Expected to Exit Government Conservatorship

Behind this surge in stock prices, on one hand, the timing of this announcement is quite delicate, as it is less than three weeks before Donald Trump is expected to take office again.

This is crucial because some investors believe that Trump's re-election increases the likelihood of ending the conservatorship. Notable hedge fund manager Bill Ackman mentioned that Trump enjoys large-scale business deals, and ending the GSEs' conservatorship would be "the largest deal in history."

On the other hand, Bill Ackman has long focused on and held shares in Fannie Mae and Freddie Mac, suggesting the purchase of common stock in these two companies, noting that they have improved their capital positions and may perform relatively strongly in the current downturn of the U.S. housing market.

Additionally, as part of the newly released guidelines, the Treasury committed to developing a detailed plan, publicly soliciting public opinion, and consulting with the Financial Stability Oversight Council (FSOC) and the President. This measure is expected to help the government, market participants, and investors better understand the specific steps for ending the conservatorship.

Bloomberg cited a senior Biden administration official who wished to remain anonymous, stating that even with this new agreement, it would not constrain the future government's freedom to act. However, this new agreement provides the market with a clear framework for how the end of conservatorship will proceed During the 2008 financial crisis, both the Federal National Mortgage Association and Freddie Mac fell into distress, lacking sufficient profits to pay shareholders, and even suspended dividends for preferred shareholders. This resulted in significant losses for many preferred stock investors, who could not receive the expected returns from these companies. A statement on Thursday indicated that the new agreement would not affect the capital retention and corresponding dividend payments of the Federal National Mortgage Association and Freddie Mac.

Despite the signing of the new agreement, fully privatizing these two companies remains a long and complex process. Bloomberg Intelligence analyst Ben Elliott stated that the government's exit "will not happen until at least 2026-2027."

During the first term of the Trump administration, Mark Calabria, then the director of the Federal Housing Finance Agency (FHFA) responsible for overseeing the Federal National Mortgage Association and Freddie Mac, advocated for releasing these entities from government conservatorship.

However, the plan to release from conservatorship ultimately failed to make progress. The reason was that government officials realized that this initiative involved not only complex adjustments to the financial structure but also could have a significant impact on the housing market, especially in the context of market turmoil, where releasing conservatorship could bring uncertainty and risk