Fannie Mae, Freddie Mac surge as Bill Ackman pushes for exit from government control

The Federal National Mortgage Association, known as Fannie Mae, and the Federal Home Loan Mortgage Corporation, or Freddie Mac, have each risen more than 60% from Oct. 14 to Monday's close. Both stocks were up roughly 3% on Tuesday.

Ackman, the founder of Pershing Square Capital Management, said in an interview with CNBC's “Squawk Box” that the midterms were the reason the issue was not being addressed right now. “The reason why it's not being touched right now is, you know, midterms,” he said. In his quarterly letter to shareholders, issued Monday, Ackman said he believes Freddie and Fannie have the potential to increase “10-fold from current share prices.”

Fannie and Freddie buy mortgages from banks and other lenders and package them into mortgage-backed securities, or MBS. Their operations are critical to the housing market, providing liquidity to banks and creating a secondary market for MBS. The entities were placed into conservatorship in September 2008 during the financial crisis. Their stocks were delisted from the New York Stock Exchange in 2010 and have traded over the counter since.

President Donald Trump has supported ending the conservatorship. But it remains politically and economically contentious. The entities operate under strict capital requirements and would need to be recapitalized, potentially through issuing common equity. The Treasury Department would also need to figure out an exit plan for its roughly $388 billion ownership stake in the entities through preferred securities and warrants. Congress may also need to pass legislation to restructure the government's role in mortgage financing.

Treasury Secretary Scott Bessent recently said action could come before Trump's term ends. He told 2Way's “The Morning Meeting” podcast that the administration will tackle the ownership structure “next year, the year after,” adding that affordability will guide the decision.

One point of controversy is whether ending conservatorship would increase the spreads on MBS over Treasuries, making mortgages costlier. Bessent has sought to reassure the market, saying, “Whatever we do is going to be guided by making sure that the spread on [agency] mortgages … over the Treasury does not increase.”

Ackman argues that privatizing the government-sponsored enterprises would help insulate them from political interference. “Fannie and Freddie are these massive, enormously profitable institutions where whichever political party controls them…if they're still in conservatorship, can influence the outcome of elections,” he told CNBC. He described a scenario where Democrats win the White House while conservatorship remains in place, and they push the entities to lower credit standards to expand home ownership and affordability. “If they're going to move more aggressively into borrowers with lower credit quality, for example, to achieve a political objective, that's going to have an impact on trillions of dollars outstanding mortgage securities,” Ackman said. MBS investors want certainty about how the entities will be run, he noted. “That only gets resolved in a world in which they exit conservatorship, they become publicly traded companies that are owned by institutional and retail investors. We set the rules. In conservatorship, the president can do anything.”