Michael Burry’s Bets on Fannie Mae and Freddie Mac: An Update (December 9, 2023)
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Investor Michael Burry, famed for his prescient calls during the 2008 financial crisis as depicted in “The Big Short,” has publicly disclosed notable positions in Fannie Mae (FNMA) and Freddie Mac (FMC), anticipating potential gains from their eventual return to public markets. This renewed interest comes as the years-long conservatorship of these government-sponsored enterprises (GSEs) continues to be debated and potential paths to recapitalization and privatization are explored. While Burry initially discussed his position in December 2023 via his Substack newsletter, “Cassandra Unchained,” https://www.substack.com/profile/cassandra-unchained the situation remains dynamic and requires careful examination.
The History of Fannie Mae and Freddie Mac’s Conservatorship
Fannie Mae and Freddie Mac were created by Congress to enhance the availability and affordability of mortgage financing in the United States. They achieve this by purchasing mortgages from lenders,packaging them into mortgage-backed securities (MBS),and guaranteeing these securities. This process provides lenders with capital to issue new mortgages, effectively increasing liquidity in the housing market.
Though, during the 2008 financial crisis, both GSEs faced substantial losses due to their exposure to subprime mortgages. In September 2008, the federal Housing Finance Agency (FHFA) placed both Fannie Mae and Freddie Mac into conservatorship, taking control of their operations to prevent their collapse and stabilize the housing market.https://www.fhfa.gov/Media/Timeline/Pages/default.aspx As then, they have been operating under government control, receiving periodic capital injections from the Treasury Department.
Burry’s Investment Thesis and Predictions
Burry believes that an IPO for Fannie Mae and Freddie Mac could unlock significant value. In his December 2023 newsletter, he predicted that the IPOs could be priced between 1 and 1.25 times their book value, with the potential for share prices to rise to 1.5 to 2 times book value within a year or two post-listing.He argues that freeing the companies from the constraints of conservatorship will allow for accelerated growth.
His rationale centers on the GSEs’ critical role in the U.S. housing market. Together, Fannie Mae and Freddie Mac own or guarantee approximately 62% of outstanding U.S. mortgage loans and back around 70% of conforming bank loans. https://www.urban.org/research/publication/fannie-mae-and-freddie-mac-overview-and-current-issues This dominance makes them essential to maintaining mortgage credit availability for homebuyers and multifamily real estate investors.
Burry also speculated that berkshire Hathaway, led by Warren Buffett, might take a substantial position in any potential IPO, given its prior investments in mortgage-related companies and a previous stake in Fannie Mae. https://www.reuters.com/markets/deals-news/burry-says-he-owns-fannie-freddie-mac-shares-expects-ipo-2023-12-08/
Current Status and Challenges to recapitalization
As of December 9, 2023, Fannie Mae and Freddie Mac remain in conservatorship. While the Trump administration previously considered plans for IPOs, these efforts stalled. The Biden administration has signaled a different approach,focusing on housing affordability and addressing systemic issues within the housing finance system.
Several challenges remain in resolving the conservatorship:
* Capital Requirements: The FHFA has indicated a need for the GSEs to build up significant capital reserves to withstand future economic downturns. https://www.fhfa.gov/newsroom/news-release/fhfa-announces-capital-rule-for-fannie-mae-and-freddie-mac
* Legal Disputes: Shareholders of Fannie Mae and Freddie Mac have filed lawsuits challenging the government’s actions during the conservatorship,arguing that they were unfairly deprived of the benefits of the companies’ eventual recovery.
* Political Considerations: Any plan to recapital
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