Multiple proposals have been in play for government-sponsored enterprises Fannie Mae and Freddie Mac, including some scenarios that could affect the status of their shares.
The question for the industry now is how the various possible directions Fannie Mae and Freddie Mac could take will affect the many mortgage-related businesses that work with them.
This series, which starts by examining what appeared to be the most likely big-picture GSE reform change at deadline, will go on to look at how this and other proposed Fannie and Freddie initiatives may impact industry credit, pricing, products and institutions in the home lending ecosystem.
Fannie and Freddie's oversight agency and the GSEs did not offer any information beyond what is in the public record in response to inquiries about these topics.
Prospects for uplisting the GSEs
The idea is one of several that have surfaced as Trump administration officials explore whether the GSEs could be monetized for taxpayers, potentially
Ackman has pitched his idea as the most likely to be viable in the near-term. Analysts have said it's not out of the question, but could face some hurdles.
The biggest may be whether the Treasury, which has been closely tied to the GSEs since a housing crash forced them into conservatorship in 2008, will forgive senior preferred shares as Ackman has proposed, according to a report by Keefe, Bruyette and Woods. KBW is a financial services specialist that has some business ties to the enterprises.
Forgiving the shares the Treasury acquired in senior preferred stock purchase agreements has downsides for taxpayers, but would be of less concern to investors who dislike conversion as an alternative concept proposed in discussions around potentially conducting a secondary offering.
There may be ways to ease concerns on both sides. Some have long argued that the GSEs' profitability since entering conservatorship means the senior preferreds are already repaid. How the courts might view that claim, though, remains an open question.
Ackman also proposed the uplisting as a potential building block for a secondary stock offering, followed by
"What would that mean and be owned by shareholders? I think that would be potentially a game changing kind of an approach for mortgage lending in a variety of different ways," said Larry Goldstone, president of capital markets and lending at BSI Financial Services.
If the GSEs were to actually clear all the hurdles it would take to leave conservatorship with an implicit backstop in place, they would likely still operate with some government controls, he noted.
"Ultimately the government is going to be responsible for all the losses on those loans, so I think there would be some constraints on them," Goldstone said.
What being back on the NYSE would mean
Ackman has cited new investment as a key benefit to uplisting Fannie and Freddie as companies tend to have rules that bar or limit investments in stocks that trade over-the-counter.
Industry investors could be part of that, but they would likely consider the GSEs' history, the status of government's stake and backing, and whether the enterprises long run of profitability since then is sufficient to provide confidence in shares that have been trading like
Fannie and Freddie would have to ensure they meet certain standards to stay on the NYSE, including not allowing the prices of their shares to fall below certain thresholds. Investors broadly also would likely consider the status of the government backstop, which officials have pledged to protect.
George said that the GSEs' shares could be considered more comparable to those of private mortgage insurers and have the potential to be competitive in that context. Adjustments to their capital framework amid reform would have to be addressed, he added.
"I think they're going to have a real hard time doing anything other than for the current construct," said Dan Cooper, executive vice president of capital markets and servicing at Cornerstone Home Lending and Cornerstone Capital Bank. "I know they would like to have at least an element in the private market, but I think there's a lot of headwinds and a lot of complexity to it."
Big picture change but an incentive for market stability
The idea of changing the larger status of the GSEs may appear daunting, with the potential to reshape industry dynamics in unpredictable ways.
In reality, the fact that policymakers have that type of reform in mind means they are more likely to try to avoid upsetting the mortgage companies they work with as well as investors, according to George.
"Their main focus seems to be to make sure that the market is stable and affordability improves if possible," he said.
