Trump could finally end one of the oldest financial fights on Wall Street

Investors are ramping up bets that Trump 2.0 will loosen the federal government’s grip over mortgage giants Freddie Mac (FMCC) and Fannie Mae (FNMA), ending one of the oldest fights on Wall Street.

The stocks of Freddie Mac and Fannie Mae — semi-acronyms for Federal Home Loan Mortgage Corporation and the Federal National Mortgage Association — have jumped 116% and 143% since Donald Trump’s election win, according to Yahoo Finance data.

They both play a central role in the US housing market by purchasing mortgages from lenders and repackaging them as securities, and both fell under government control during the 2008 financial crisis as mortgage defaults soared.

Some of Wall Street’s most prominent investors, including John Paulson and Bill Ackman, began wagering that the companies would eventually be returned to private control by purchasing common and preferred stock in Fannie and Freddie.

They hoped it would happen during the first Trump administration, only to see that effort fizzle. Now some believe a second Trump administration can get it done, even if it still takes some more time.

“It is 100%, in my mind, mechanically doable by 2027,” said Mark Calabria, the former director of the Federal Housing Finance Agency (FHFA), which oversees the two mortgage giants.

He put the odds of such a development at 70%, saying “there’s zero chance” it will happen in 2025.

The Wall Street Journal reported in September that former Trump administration figures and bankers had been discussing a privatization of the mortgage giants, but Trump himself was mum on the topic while campaigning.

The argument for doing it is that selling the government’s stakes in the companies is not only written into law but could also generate billions that could be used to reduce the deficit and return money to taxpayers. The argument against it is that it could affect access to credit in the housing market, which relies on Fannie and Freddie to fund 30-year mortgages.

Read more: How mortgage-backed securities: impact the housing market and interest rates

Much will also depend on whom Trump picks to run the FHFA and the Treasury Department.

Paulson, a billionaire hedge fund manager who made a fortune betting against subprime mortgages during the 2008 crisis, had been rumored as a candidate for the Treasury post but said last week that “my complex financial obligations would prevent me from holding an official position in President Trump’s administration.”

It has been a long, uneven ride for hedge funds that began wagering on a privatization of Fannie and Freddie after the Treasury Department injected a total of $189 billion into the institutions.

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The federal government altered the terms of its takeover agreement in 2012, as Fannie and Freddie returned to profitability, by sweeping all net profits of those institutions into the Treasury Department as dividends.

That hurt the bets taken by Wall Street investors. The value of Fannie and Freddie’s common stock plummeted and shareholder lawsuits followed.

There was new hope once Trump came into office in 2017 that Wall Street’s long-running bet would pay off, with Treasury Secretary Steve Mnuchin and Calabria supportive of returning the companies to private hands.

The administration released a report in September 2019 that offered a plan for returning them to private ownership with a government backstop.

The idea was to increase the capital held by the mortgage companies and then eventually sell the government’s ownership in a massive public offering. The companies could pay a fee for their future reliance on a US government backstop.

But the administration ran out of time on that plan.

“Had it not been for the pandemic, you know, we would have got them out of conservatorship and back on their feet,” Calabria said.

Given the work done by the last Trump administration, the new one could go back to that Trump 1.0 framework for how privatization of the mortgage giants could work, complete with the fee paid to retain future government support.

“The upside” of privatizing Fannie and Freddie would be “restoring the innovation and the entrepreneurial spirit” of the institutions, said former Freddie Mac executive Edward Golding, who also served as head of the Federal Housing Administration during the Obama administration and now is executive director at the MIT Golub Center for Finance.

But Golding was also quick to caution that there could be unintended ramifications to the housing market.

“You do have to be careful turning over duopoly power to the private sector,” he added.

David Hollerith is a senior reporter for Yahoo Finance covering banking, crypto, and other areas in finance.

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