Trump mulling exit nudges GSE stocks higher, MBS wider

President Trump's stated interest in exploring a public offering of Fannie Mae and Freddie Mac's shares had led to some shifts in how their stock and mortgage-backed securities traded at deadline on Thursday, but not to the degree a commitment to a conservatorship exit would have.

Barclays reported that shares of the larger of the two government-sponsored enterprises that buy a significant portion of the mortgages made in the United States, Fannie Mae, started the day up around 30%, according to a Barclays report. Freddie also experienced some gains that lagged Fannie's.

Agency mortgage-backed securities spreads were wider by two to three ticks at deadline, according to Walt Schmidt, a senior vice president at FHN Financial, who indicated that the reaction was muted because showing interest in a Fannie/Freddie IPO is a lot different from committing to one.

"If we were pricing in the end of conservatorship, we might be a couple points wider. It would be really wide. We're only a couple ticks wider. It's not that big of a move," he said in an interview.

While Fannie and Freddie's stock could benefit from a conservatorship reversal, an exit raises some questions for the large to-be-announced MBS market they back as it suggests change to the status of the guarantee they provide.

But there are consistent signals that show Washington does not want to unduly disrupt MBS trading, according to Barclays' report.

"The end to the conservatorships is likely to be structured in a way that does not increase mortgage rates, i.e., does not widen the MBS basis. This is consistent with long-standing bipartisan policy of pursuing reform without disruption to the TBA market," Barclays' researchers said.

The need to get Fannie and Freddie back to capital levels in line with those in the private market and how to handle the investment Treasury has in the GSEs are the other key challenges in how to free them from conservatorship, according to a research note by Keefe, Bruyette & Woods.

Other immediate reactions to Trump's interest in raising cash by taking the enterprises public, which followed discussions with legislators who expressed concerns about the deficit in budget negotiations, included suggestions for how the money could be reinvested.

"President Trump is right to free Fannie and Freddie. But even better, let's use the proceeds – some $250 billion – to build middle-class housing for American workers," said  Gary LaBarbera, president of the Building and Construction Trades Council of Greater New York and member of the Housing for US.

Some of the estimates for what could be made from floating a public offering for the GSEs, billing it potentially as the largest in history, are "a little aggressive," according to Schmidt, who said based on where their shares are currently trading, the amount would more likely to be less than half that much.

The director of Fannie and Freddie's regulator, Bill Pulte, has said he will be working to improve the enterprises' already strong earnings to increase their value. Pulte has placed himself in direct control of the GSEs as chair of their boards to that end.

Democrats have questioned the legality of his position on Fannie and Freddie's boards, but Pulte said this week he learned from a discussion with one of the critics that this stems from a misunderstanding of his role, which is not just to serve as Fannie and Freddie's regulator but also as their conservator.