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Here's Why Fannie Mae and Freddie Mac Are Soaring on Thursday

By Matthew Frankel, CFP® - Updated May 21, 2020 at 2:30PM

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Investors have renewed hope for the two mortgage giants.

What happened

The stock market is having a very calm day on Thursday, with major averages slightly lower as of 2 p.m. EDT. On the other hand, mortgage giants Fannie Mae (FNMA 2.85%) and Freddie Mac (FMCC 3.12%) are spiking higher, up by 17% and 19%, respectively. 

This move might seem counterintuitive at first. After all, earlier in the day, a report indicated that mortgage delinquencies rose by 1.6 million in April, the largest jump in history. But that's not what is on investors' minds. 

Front porch of home with for sale sign.

Image source: Getty Images.

So what

The holy grail for stock investors in Fannie and Freddie would be for the two government-sponsored enterprises to exit conservatorship. As it stands, the profits of both agencies are swept away by the government, a lingering condition of the bailout they received during the financial crisis.

Well, on Wednesday afternoon, the Federal Housing Finance Agency (FHFA) proposed a new capital framework for the two companies. In short, this would be a big step on the road to being freed from government conservatorship, and to allow the companies to start earning profits for their investors. Fannie and Freddie insure roughly half of the entire mortgage market, so making sure the agencies are well capitalized is a must before they could be released from government control. The FHFA proposal says that the companies should hold a total of $240 billion in capital to be well positioned to avoid any further bailouts. 

Now what

The FHFA said that it would like to finalize the proposed capital plan by the end of the year, which would allow Fannie and Freddie to raise outside capital as early as next year. While there's still a long way to go before these companies are returned to the private sector, this news is helping investors to see the light at the end of the tunnel.

Matthew Frankel, CFP has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Federal National Mortgage Association Stock Quote
Federal National Mortgage Association
FNMA
$0.65 (2.85%) $0.02
Federal Home Loan Mortgage Corporation Stock Quote
Federal Home Loan Mortgage Corporation
FMCC
$0.63 (3.12%) $0.02

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