Bill Ackman: Betting on 500% Upside? Best Stocks to Buy Now? Fannie Mae (FNMA) & Freddie Mac (FMCC)

Summary

Billionaire investor Bill Ackman’s thesis on Fannie Mae (FNMA) and Freddie Mac (FMCC) highlights their massive upside potential. These government-sponsored enterprises (GSEs) guarantee over 50% of U.S. mortgages and could experience significant growth if fully privatized. Ackman suggests that with minimal capital and a 2.5% equity requirement, both GSEs could be recapitalized and return to the market, offering huge returns. Despite the uncertainties surrounding capital requirements, Ackman sees hundreds of percent upside potential, with FNMA possibly reaching $35 per share by 2026. However, this opportunity remains speculative and hinges on privatization and market conditions.

Takeaways

• 😀 Bill Ackman predicts that Fannie Mae (FNMA) and Freddie Mac could provide hundreds of percent upside in the coming years, with FNMA already up over 100% and Freddie Mac up over 80%.
• 😀 Ackman believes that the US government's previous bailout of Fannie Mae and Freddie Mac during the financial crisis has turned into a profitable investment for taxpayers, generating substantial returns.
• 😀 Fannie Mae and Freddie Mac are government-sponsored entities (GSEs) that guarantee a significant portion of the US residential mortgage market, allowing investors to access lower-cost financing.
• 😀 Fannie Mae and Freddie Mac's business model involves turning illiquid 30-year fixed mortgages into liquid mortgage-backed securities, providing insurance on the credit risk associated with them.
• 😀 Historically, Fannie Mae and Freddie Mac have been a low-risk investment model, but their involvement in subprime mortgages during the financial crisis led to significant losses, ultimately resulting in a government bailout.
• 😀 Donald Trump previously pushed for the privatization of Fannie Mae and Freddie Mac, arguing that it would benefit US citizens and eliminate government oversight. This could potentially happen in a future administration.
• 😀 Fannie Mae and Freddie Mac's capital requirements are a major point of concern. The Federal Housing Finance Agency (FHFA) has proposed requiring them to hold 4% equity, while Bill Ackman suggests a lower 2.5% requirement, which would be more manageable.
• 😀 If Fannie Mae meets the 2.5% equity requirement, it could raise $5 billion through an IPO, bringing it back to the public market with a manageable capital structure.
• 😀 Fannie Mae is considered to be in a better position than Freddie Mac, as it would require less capital to meet the equity requirements, making it the lower-risk investment of the two.
• 😀 Ackman forecasts that Fannie Mae could achieve a share price of $35 by 2026, with the possibility of even higher returns depending on the market conditions and the required capital structures.
• 😀 Bill Ackman’s investment thesis suggests that the US government could earn billions more from the sale of its stake in Fannie Mae and Freddie Mac, which would benefit both taxpayers and investors.

Q & A

What is Bill Ackman's thesis regarding Fannie Mae (FNMA) and Freddie Mac (FMCC) for 2025?

Bill Ackman believes that Fannie Mae and Freddie Mac could be among the best investments for 2025, with potential for hundreds of percent upside. He suggests that these companies could revalue significantly higher if they are privatized or restructured.

Why have Fannie Mae and Freddie Mac been under government control since the 2008 financial crisis?

Following the financial crisis, Fannie Mae and Freddie Mac were placed into conservatorship due to significant losses, particularly from risky subprime and Alt-A loans. The U.S. government provided financial support, effectively taking control of the companies.

How does the business model of Fannie Mae and Freddie Mac work?

Fannie Mae and Freddie Mac guarantee over 50% of the U.S. residential mortgage market. They convert long-term, illiquid mortgages (like 30-year fixed-rate mortgages) into liquid mortgage-backed securities and provide insurance on the credit risk of these securities.

What is the significance of Fannie Mae and Freddie Mac’s role in the U.S. housing market?

These entities help facilitate access to lower-cost financing by ensuring the credit risk of mortgage-backed securities, thus allowing global investors to purchase them. This enables U.S. homeowners to access long-term, fixed-rate mortgages, a unique feature not commonly available in other countries.

What does Bill Ackman say about the historical risk of Fannie Mae and Freddie Mac's business model?

Ackman points out that, historically, Fannie Mae and Freddie Mac's business model has been lower risk. For example, in a typical mortgage, the homeowner's equity is the first line of defense against losses, meaning the mortgage guarantee would only be impacted after the homeowner's equity is exhausted.

What are the potential capital requirements that could affect Fannie Mae and Freddie Mac's future?

The Federal Housing Finance Agency (FHFA) has proposed that Fannie Mae and Freddie Mac should hold 4% equity relative to the liabilities they guarantee, which could lead to increased costs for homeowners. Bill Ackman suggests a lower threshold of 2.5% equity, which would be more manageable and possibly allow these companies to go public again.

What is Bill Ackman’s outlook on the potential public offerings of Fannie Mae and Freddie Mac?

Ackman believes that Fannie Mae could potentially return to the public market with a $5 billion IPO, while Freddie Mac might require around $15 billion. This could lead to significant upside for investors if they are privatized and their capital structure is improved.

Why does Ackman think that Fannie Mae might be a better investment than Freddie Mac?

Ackman suggests that Fannie Mae is in a better position financially, requiring less capital to meet the 2.5% equity threshold compared to Freddie Mac. This makes Fannie Mae the lower-risk option of the two in terms of capital requirements.

How does Bill Ackman’s view align with Donald Trump’s actions regarding Fannie Mae and Freddie Mac?

Bill Ackman’s thesis aligns with Donald Trump’s efforts to privatize Fannie Mae and Freddie Mac. In 2021, Trump advocated for selling off the government’s stake in these companies, a move that could generate significant profits for taxpayers and remove liabilities from the government’s balance sheet.

What role could Bill Ackman’s nominated regulator at FHFA play in the future of Fannie Mae and Freddie Mac?

Bill Ackman suggests that the nomination of Bill P., a capital markets expert, to oversee the FHFA could increase the likelihood of a successful restructuring or privatization of Fannie Mae and Freddie Mac. This could expedite the process and help improve the odds of a favorable outcome for investors.