GSE Stocks: Ackman predicts 10-fold return if conservatorship ends

The midterm elections may serve as a catalyst for releasing the government-sponsored mortgage entities from federal conservatorship, according to billionaire investor Bill Ackman. The market appears to be pricing in this possibility, as shares of the Federal National Mortgage Association and Federal Home Loan Mortgage Corporation have risen more than 60% from October 14 to Monday's close. Both stocks gained approximately 3% on Tuesday.

Ackman, founder of Pershing Square Capital Management, holds positions in both companies. In a shareholder letter issued on Monday, he stated that Fannie Mae and Freddie Mac could see their share prices increase 10-fold from current levels if they are freed from government control. He told CNBC's "Squawk Box" that the current political climate surrounding the midterms is a primary reason the issue has not been addressed more aggressively yet.

The two 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. They purchase mortgages from lenders and package them into mortgage-backed securities, a process that provides liquidity to banks and creates a secondary market for these instruments.

President Donald Trump has expressed support for ending the conservatorship, but the move remains contentious. The entities operate under strict capital requirements and would need recapitalization, potentially through issuing common equity. The Treasury Department must also devise an exit plan for its approximately $388 billion ownership stake, held through preferred securities and warrants. Congress may need to pass legislation to restructure the government's role in mortgage financing and home-loan guarantees.

Treasury Secretary Scott Bessent recently indicated that the administration intends to address the ownership structure within the next two years. Speaking on 2Way's "The Morning Meeting" podcast, Bessent noted that affordability will guide the decision. He sought to reassure the market that ending the conservatorship would not increase the spreads on agency mortgages over Treasuries, which would effectively raise the cost of mortgages for borrowers.

Ackman argues that privatizing the government-sponsored enterprises would insulate them from political influence. He warned that if the entities remain in conservatorship, the party controlling the White House can influence outcomes to achieve political goals. For example, he suggested that a Democratic administration might push the entities to lower credit standards to expand home ownership. Ackman stated that such moves could impact trillions of dollars in outstanding mortgage securities and overall credit spreads.

The investor emphasized that MBS investors require certainty about how the entities will be managed. Ackman believes this certainty is only achieved when the companies exit conservatorship and become publicly traded entities owned by institutional and retail investors. He noted that in the current structure, the president has the ability to change rules, whereas in a privatized model, established rules would govern operations.