The outcome for Fannie Mae and Freddie Mac's stock is "in the Trump administration's hands," with pressure to determine this before the president's term ends, according to Michael Burry, a famous investor.
In a new report published Friday, Burry downplayed the impact of Trump's recent executive order on mortgage credit and its potential to change the enterprise regulatory capital framework, which the GSEs' oversight agency is due to release a report on soon.
"There is no indication of any clarity regarding the ERCF," said Burry, who invested in the government-sponsored enterprises after they went into conservatorship during a crisis he's known for being one of the first to predict.
The disposition of Treasury's priority capital position and a 2028 deadline are more likely determinants, Burry wrote in his
"Shareholders' Sisyphean saga comes down to the senior preferred stock liquidation preference," Burry said in a follow-up to an earlier report on the enterprises, which he refers to as "the Twins."
Who gets the earnings?
Under the current version of the Treasury agreement, which has been adjusted over time to account for the fact that the GSEs have recovered from the crisis that forced them into conservatorship in 2008, they can retain earnings to build capital to certain levels.
"Fannie and Freddie as enterprises benefit from improved capital position, but common shareholders do not see it and today have no claim to it," noted Burry, who was depicted as predicting the housing crash that led to conservatorship in the movie, "The Big Short."
Since the enterprises have been allowed to retain earnings to build capital, the Treasury's not getting much from Fannie and Freddie either, Burry noted.
"There is a general misunderstanding that the Twins are currently sending profits back to the U.S. government. This is not true. The Treasury is not getting significant cash flows from the Twins at this time," he wrote.
This puts some pressure on the government to do something to monetize the enterprises, and Burry said a change to the senior liquidation preference would be the first step before the administration would allow something like the new stock offering it has contemplated.
There have been arguments around whether the government should allow the senior preferred shares to be deemed paid, with many private investors like Burry arguing for it.
"The Twins have paid far more to the Treasury than was ever provided to them," said Burry, who was depicted as predicting the housing crash that led to conservatorship in the movie, "The Big Short."
If that argument is compelling to policymakers, "then all those retained earnings indeed belong to the Twins, and the shares rise 3-4x from current levels initially, and 6-7x in time," Burry predicts.
However, he added that "the ugly truth" is that a different decision also could emerge that would hurt the GSEs' stock."If the SPS LP is affirmed by Treasury, the Twins' stocks will fall straight to the low single digits, or lower," Burry wrote.
A deadline for action?
Treasury's stake in the enterprises is in the form of 79.9% warrants that are due to expire in September 2028, which could be a catalyst for action.
"This will likely bring Fannie and Freddie back to the fore as Trump will be interacting with donors and looking to finish a few things in his lame duck year," Burry said.
However, the Federal Housing Finance Agency that oversees the enterprises and the Treasury Department could agree to amend the expiration date, so the soft deadline is no guarantee that there will be a decision on the senior preferred shares by that time.
"Treasury expects that the parties will agree in the future to extend the Sept. 7, 2028 expiration date to the extent appropriate in order to avoid any possibility of a disorderly or disruptive exit from conservatorship," the department said in a press release issued early last year.
