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Why The GSE Shares Rallied

It’s been more than a week since Joseph Otting, Acting Director of the Federal Housing Finance Agency (FHFA) remarked on the possibility of the end of conservatorship of Fannie Mae and Freddie Mac. While the remarks made the share prices of both the government-sponsored enterprises soaring, the rally didn't stop this week as investors became more hopeful that Fannie and Freddie could soon be out of government conservatorship.

Otting had remarked last week that the Treasury and the White House were expecting to release a plan for housing that would include details about reform as well as recommendations for ending the conservatorship.

However, in a note to Bloomberg Isaac Boltansky, an analyst at Compass Point, there's an "enormous difference between the promise of a plan at some point in the future and an actionable proposal reshaping a vital cornerstone of the economy." He said that Otting's remarks were "simply the repackaging of a previously used talking point."

Boltansky makes a point. The end of conservatorship has been under discussion since the administration released a plan to end GSE conservatorship in June 2018. The proposal called upon policymakers to "pursue an approach that would level the playing field with the private sector to decrease the Federal subsidies supporting housing," and states that competition to the duopolistic role held by the now privately-owned GSEs would be essential reform to decrease moral hazard and risk to taxpayers.

More recently, a report by The Milken Institute built on the progress that has been made towards a safer housing finance system through the conservatorship of the GSEs under the FHFA. Titled, "A Blueprint for Administrative Reform of the Housing Finance System," the report makes a case for why the government must avoid releasing the Fannie Mae and Freddie Mac from conservatorship without fixing some of the flaws in their charter.

According to the Bloomberg report, other analysts like Boltansky were also skeptical about the administration's plans on a proposal to "recommend freeing the mortgage-finance giants Fannie Mae and Freddie Mac from government control." Jim Vogel from FTN Financial wrote in a note to Bloomberg that the changeover in directorship was "always going to stir up GSE headlines (and possible confusion)." He said that despite the current situation, they were keeping a sharp eye out for further details of any official plan for the GSEs to leave conservatorship.

About Author: Radhika Ojha

Radhika Ojha, Online Editor at the Five Star Institute, is a graduate of the University of Pune, India, where she received her B.A. in Commerce with a concentration in Accounting and Marketing and an M.A. in Mass Communication. Upon completion of her master’s degree, Ojha worked at a national English daily publication in India (The Indian Express) where she was a staff writer in the cultural and arts features section. Ojha also worked as Principal Correspondent at HT Media Ltd and at Honeywell as an executive in corporate communications. She and her husband currently reside in Dallas, Texas. You can contact her at Radhika.Ojha@theMReport.com.
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