In one fell swoop, the Supreme Court crushed Fannie Mae and Freddie Mac shareholders and gave President Joe Biden carte blanche to rewrite the rules for the U.S.’s massive housing market.
Left unanswered was the same question that’s befuddled Washington for more than a decade: Will anyone ever figure out what to do with Fannie and Freddie, which backstop a whopping $5.7 trillion of mortgages?
The high court’s decision Wednesday largely shot down investors’ claims that Obama era regulators exceeded their authority when they decided to send nearly all of Fannie and Freddie’s profits to the U.S. Treasury—a ruling that could save the federal government more than $100 billion. The justices also made clear that the president can remove the head of the Federal Housing Finance Agency, Fannie and Freddie’s overseer.
Within hours, the White House said Biden would oust FHFA Director Mark Calabria, a libertarian economist who was installed by former President Donald Trump. And Capitol Hill Democrats started demanding that the FHFA refocus Fannie and Freddie on making housing more affordable—a top priority for progressives.
Once the dust settled, Fannie and Freddie shares had both plunged more than 32%, the biggest one-day slide for the companies since February 2017. The bleeding was even worse for various share classes of preferred stock owned by major hedge funds, triggering losses that in some cases exceeded 60%.
Funds’ Pain
Among firms likely hurt by the high court’s decision were Paulson & Co., Pershing Square Capital Management and Fairholme Funds Inc., which have sought for years to get their hands on Fannie and Freddie’s profits.
With a new FHFA appointee, Biden will in effect be able to control the standards and cost of loans backed by Fannie and Freddie, which make up around half of the mortgage market.
In a statement released late Wednesday, the FHFA said the White House had named Sandra Thompson the regulator’s acting director. She had been the FHFA’s deputy director of the division of housing mission and goals. Biden hasn’t nominated a permanent successor to Calabria and any candidate would have to be confirmed by the Senate.
While Calabria had moved to shrink Fannie’s and Freddie’s footprint, many housing analysts expect Biden to use Fannie and Freddie to make loans cheaper and easier to get for minority groups and less-well-off borrowers, who historically have found it more difficult to buy a home.
In addition to borrowers, those decisions affect lenders, mortgage-bond investors, and issuers of privately-backed mortgages that compete with Fannie and Freddie.