Why Fannie Mae and Freddie Mac Are Soaring by 30% Today

By Markets Fool.com

Image source: Flickr user Oran Viriyincy

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What happened

Shares of Fannie Mae (NASDAQOTH: FNMA) and Freddie Mac (NASDAQOTH: FMCC) are up about 30% as of 11:05 a.m. EST after President-elect Donald Trump's nominee for Treasury secretary suggested that the government-sponsored entities (GSEs) should be returned to private investors.

So what

Steven Mnuchin, his nominee, said that Fannie Mae and Freddie Mac should no longer be under government control, suggesting that the two companies could be returned to private ownership on a "reasonably fast" timeline.

Fannie Mae and Freddie Mac were placed into government conservatorship in Sept. 2008. The U.S. Treasury invested $187.5 billion into the mortgage companies, in exchange for warrants that entitled the Treasury to nearly 80% of their common stock, in addition to preferred stock with a 10% dividend yield.

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In Aug. 2012, the terms of the conservatorship were amended. Rather than pay a fixed dividend rate to the U.S. Treasury, Fannie Mae and Freddie Mac began to pay dividends based on their net worth. In effect, the so-called "net worth sweep" pushed all the would-be profits from Fannie and Freddie to the U.S. government beginning in the first quarter of 2013.

Now what

Whether the net worth sweep was appropriate has been debated among investors and in the courts. In 2014, a judge dismissed a shareholder lawsuit against the government, ending what seemed like the most probable route to making the GSEs private again.

With Trump as president and Mnuchin in the U.S. Treasury, however, investors believe the odds of a privatization of the GSEs are significantly higher. So far, shares of both companies are up more than 140% this year, with the majority of gains coming after Trump's presidential win earlier in November.

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