Fannie Mae, Freddie Mac : Ackman's Full Presentation – Sohn Conference

HFA Padded
HFA Staff
Published on
Updated on

Yesterday, Bill Ackman spoke about the long case for Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) at the Ira Sohn Conference. We told readers we would likely be getting the slides.Since the document was around 110 pages and Ackman only (officially) had 15 minutes to speak the slides are useful for those interested in the pitch.


See our full Ira Sohn 2014 coverage here.

Below is the full 112 pages of them, enjoy!

Full PDF for download here 

It’s Time to Get Off Our Fannie Mae

Ira Sohn Conference

May 5, 2014

Fannie Mae & Freddie Mac (GSEs)










Recent stock price:


FNMA: $3.98 FMCC: $3.98






Provide a guarantee on the credit risk of ~$5 trillion of U.S. mortgages


~50% share of outstanding mortgages


~60% share of annual originations



Combined equity market cap of ~$36bn including Treasury warrants


Combined 2013 pre-tax earnings of ~$39bn


~$72bn of deferred tax assets



f Operating in conservatorship since September 2008



Currently required to pay 100% of earnings to U.S. Treasury



U.S. Treasury owns warrants on 79.9% of the common stock 

History of the GSEs

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% 

The Great Depression





During the Great Depression, the U.S. mortgage market was paralyzed and required significant government involvement to eventually recover


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

f 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

f 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





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 GSEs’ Role in the Marketplace



The GSEs were chartered by Congress to support liquidity, stability, and affordability in the secondary mortgage market



Fannie and Freddie’s role in the mortgage market



Convert long-term, illiquid mortgages into highly-liquid mortgage backed securities (MBS)


Provide insurance on the credit risk on the underlying mortgages of the MBS


Facilitate the sale of MBS to the global capital markets 

The GSEs Allow for the 30-year Mortgage



Fannie and Freddie facilitate widespread access to the 30-year, prepayable, fixed-rate mortgage at a low cost



f Widespread access to credit


The global capital markets provide a much larger and more consistent amount of credit than local lending institutions

f Long-term, fixed-rate financing


Lenders are willing to originate a high proportion of long-term, fixed-rate mortgages because they can be converted into liquid investment securities that can be retained or sold

f Low-cost financing


When interest rates decline, borrowers can refinance, lowering their monthly payments

The high level of liquidity for GSE MBS lowers mortgage interest rates

Fannie and Freddie
















(Ongoing: ~$5 trillion guarantees)


f   High-quality, low-risk


f   Does not require an implicit government guarantee


f   Serves a vital purpose for the mortgage market






Fixed-Income Arbitrage (FIA)


(Run-off: ~$1 trillion assets)


f   Low-quality, high-risk


f   Requires an implicit government guarantee


f   Does not serve a credible purpose for the mortgage market 


Fannie Mae via Pershing Square Presentation
Fannie Mae via Pershing Square Presentation

Full PDF for download

Ira Sohn Final Bill Ackman

HFA Padded

The post above is drafted by the collaboration of the Hedge Fund Alpha Team.

Leave a Comment