Pershing Square CEO Bill Ackman's presentation on Fannie Mae and Freddie Mac's upcoming release from conservatorship.
Background on Fannie and Freddie
Prior to the Great Depression
Mortgage availability was limited, with 5-to-10 year terms, floating interest rates, and ~50% loan-to-value ratios
- Mortgages were primarily originated and retained by local thrifts, commercial banks, and insurance companies
- Banks would lend at floating interest rates for a short term to match the structure of their deposit funding sources
- Supply of mortgage credit was limited and required large initial down payments
- Availability and pricing of mortgage credit varied widely across the U.S. due to localized funding
- Homeownership rate was ~45%
Read more hedge fund letters here
The Great Depression
During the Great Depression, the U.S. mortgage market was paralyzed and required significant government involvement to eventually recover
- The unemployment rate was nearly 25%
- Housing prices declined as much as 50%
- ~25% of mortgages were in default and ~10% of homes were in foreclosure
- Homeowners were unable to satisfy their principal payments and were unable to refinance their short-term mortgages
- The banking system was near collapse and was unable and unwilling to provide a meaningful amount of mortgage credit
Government’s Response to the Great Depression
During the Great Depression, the government undertook a series of mortgage-related initiatives that culminated with the creation of Fannie Mae
- 1933: Created Home Owners’ Loan Corp
- Issued government-backed bonds to fund the purchase of defaulted mortgages from financial institutions
- Converted short-term, variable rate mortgages into long-term, fixed-rate mortgages
- 1934: Enacted National Housing Act, which established the Federal Housing Administration
- Provided credit insurance on long-term, fixed-rate mortgages made by approved lenders
- 1938: Created Fannie Mae as a government agency
- Purchased FHA-insured loans to provide liquidity for mortgage lenders
Fannie Mae was chartered to support liquidity, stability, and affordability in the secondary mortgage market
Evolution of the GSEs
Fannie and Freddie (collectively, the “GSEs”) have evolved significantly since the creation of Fannie Mae in 1938
- 1948: Fannie allowed to purchase loans insured by the Veterans Administration
- Provided liquidity to long-term, low-down-payment mortgages issued to veterans returning from WWII
- 1954: Fannie converted into a “public-private, mixed-ownership” company
- 1968: Fannie converted into a for-profit, shareholder-owned enterprise
- Fannie allowed to buy non-government backed mortgages
- 1970: Freddie Mac created to securitize mortgages issued by the savings and loans institutions
- 1971: Freddie issued the first conventional loan MBS
- 1989: Freddie converted into a for-profit, shareholder-owned enterprise
The Rise of the GSEs
Since the 1980s, Fannie and Freddie have played an increasingly vital role in providing borrowers with access to an ample supply of credit
See the full presentation below.
