This is why Fannie Mae and Freddie Mac collapse on Tuesday

What happened

The stock market had a fairly strong day on Tuesday, with all major market averages up less than 1%. However, mortgage giants Fannie Mae (OTC: FNMA) and Freddie Mac (OTC: FMCC) moved sharply in the other direction. As of 11:00 a.m. EST, Fannie Mae and Freddie Mac were both down about 17% during the day.

House with sold sign in front yard.

Image Source: Getty Images.

And then

After the election, it was suggested that regulators might push to finally free the two giants of mortgage financing from the government conservatory and return them to shareholder control before the new Biden administration takes office in January. This would mean investors could once again share in the profits of the two companies – since the bailout through the financial crisis, Fannie and Freddie’s profits go straight to the US Treasury.

A Wall Street Journal interview with Treasury Secretary Steven Mnuchin indicates this is unlikely to happen. In a nutshell, Mnuchin suggested he probably isn’t in favor of an attempt to end the government conservatory before inauguration. And the two companies cannot be privatized again without the Treasury Secretary’s signature.

What now

To say the least, the privatization of Fannie and Freddie will be much more likely under a Republican government. This is why there was an effort to get it done before President Trump left office. Advisers close to Biden have indicated that ending the conservatory will not be a priority for the new government, so it probably won’t happen anytime soon.

In short, it has become much less likely that investors will be able to share in the profits of the two mortgage giants for at least a few more years. And we see that reflected in their stock prices today.