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Fannie, Freddie Shares Soar Even as Fate Remains Foggy

It is back to the drawing board for any overhaul of housing finance—and the future of Fannie Mae and Freddie Mac.

Shares of the mortgage-finance companies are up sharply since Election Day even though President-elect Donald Trump gave little if any indication during his campaign of what might happen to them in his administration. Over the past three days, shares of both Fannie Mae and Freddie Mac each have risen more than 60%.

“In talking to the campaign, the one thing they are telling me is that anyone who thinks they know what Trump thinks about Fannie and Freddie is making it up,” said David Stevens, president of the Mortgage Bankers Association.

There have been many proposals to revamp housing finance but little serious movement in the eight years since Fannie Mae and Freddie Mac were taken over by the government. It is possible that change in the White House will restart overhaul efforts—but those may not closely resemble earlier legislation.

“This remains the great unfinished business from the great recession,” said Ed DeMarco, former acting director of the Federal Housing Finance Agency, which oversees the firms, and now a senior fellow at the Milken Institute Center for Financial Markets. “Having a new administration and a new Congress creates a meaningful opportunity to pick this challenge up again.”

And there is another unknown facing Fannie Mae and Freddie Mac: U.S. Rep. Jeb Hensarling (R., Texas). Aides to Mr. Trump are considering him as a contender for Treasury secretary, The Wall Street Journal reported Thursday. He has repeatedly called for the mortgage giants to be eliminated. If he joins a Trump cabinet, his view could hold considerable sway.

Even if Mr. Hensarling stays in the House, he will matter to any housing-finance effort. His role as chairman of the House Financial Services Committee makes it unlikely any legislation dealing with Fannie and Freddie could pass without his approval.

Mr. Hensarling said in an interview Thursday that he hasn’t had “detailed discussions” yet with the Trump transition team on housing-finance overhauls, “but it is something I am very hopeful that we can accomplish in this administration.”

Meanwhile, the center of gravity for revamping housing finance has likely shifted, according to veterans of the earlier overhaul efforts. Previous proposals, one from Sens. Bob Corker (R., Tenn.) and Mark Warner (D., Va.) in 2013 and another from Sens. Tim Johnson (D., S.D.) and Mike Crapo (R., Idaho), were aimed at forging compromises acceptable to Republicans and Democrats on Capitol Hill as well as the Obama administration. At the time, Democrats not only controlled the White House but the Senate as well.

New proposals to revamp housing finance are likely to be a compromise between different factions of the Republican Party on Capitol Hill and the Trump administration. It will take time to discern how those forces will coalesce on the issue.

“It is impossible to anticipate with any certainty what path we will see on Fannie and Freddie reform in the next few years of Republican control, as the Republican caucus is divided and Trump himself has expressed no public view on the issue,” said Jim Parrott, a former senior adviser to the Obama administration who now advises financial institutions on housing-finance issues through his firm, Falling Creek Advisors.

The divide among Republican lawmakers can be viewed through the prism of the prior Capitol Hill proposals. The Senate proposals included a role for the government in backstopping the secondary-mortgage market, while separate House legislation introduced by Mr. Hensarling left Ginnie Mae as the only source of government support for the housing market.

“All the earlier proposals are dead. They were products of attempts to satisfy the Obama administration and Hill Republicans,” said Peter Wallison of the American Enterprise Institute. “The first part of that equation is no longer relevant.”

Mr. Parrott agrees. “If we see legislation at all in this space, it likely comes in the form of a compromise between these two groups of Republicans,” he said.

Shares in Fannie Mae and Freddie Mac, which still trade publicly even though the firms are in government conservatorship, have been buoyed by hopes a new administration might not adopt the Obama administration’s idea of winding down the mortgage-finance giants. Not everyone agrees, though.

“There’s nothing that Trump has ever said, or that people around Trump said, that would suggest that he would be interested in restoring Fannie Mae and Freddie Mac to their status where the profits go to shareholders and the risk is borne by taxpayers,” Mr. Wallison said.

One source of hope for Fannie and Freddie shareholders may be the role of hedge-fund manager John Paulson as a backer of Mr. Trump. Mr. Paulson’s Paulson & Co. has been among the hedge funds that have financed a lobbying campaign aimed at lifting government control of the companies and ending the sweep of their profits into the U.S. Treasury.

But any plan to release Fannie and Freddie would likely meet strong opposition from Republican lawmakers. One thing that the earlier legislative proposals that garnered Republican support all shared is that they included a plan to wind down the companies rather than release them.

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