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Why Fannie Mae and Freddie Mac Sank Today

What happened

Shares of Federal National Mortgage Association (OTC: FNMA) and Federal Home Loan Mortgage Corp (OTC: FMCC) fell more than 8% on Friday after the U.S. Treasury Department announced a plan to reform the housing-finance industry.

So what

Regulators took control over Fannie Mae and Freddie Mac, as the mortgage-finance giants are commonly known, during the 2008 financial crisis. They received a bailout of more than $190 billion to help them remain solvent. But as their businesses strengthened in the decade that followed, Fannie Mae and Freddie Mac were able to pay back those taxpayer funds plus more than $100 billion in additional dividends.

The Treasury Department's plan seeks to prevent future bailouts, limit the government's role in the housing market, and foster greater competition in the housing-finance industry.

"The Trump Administration is committed to promoting much-needed reforms to the housing finance system that will protect taxpayers and help Americans who want to buy a home," said U.S. Treasury Secretary Steven Mnuchin in a press release. "An effective and efficient Federal housing finance system will also meaningfully contribute to the continued economic growth under this Administration."

Fannie Mae and Freddie Mac help to ensure capital continues to flow into the housing market. Image source: Getty Images.

The plan also includes some initial steps toward reprivatizing Fannie Mae and Freddie Mac, but it was short on details and lacked clear timelines. The Trump Administration wants to end the government's conservatorship of the housing finance giants, but it failed to address key issues like how the companies will be recapitalized to the point where they could withstand another significant downturn in the housing market.

Investors appear to have been hoping for more clarity from the government. With many important questions left unanswered, investors responded by selling off Fannie's and Freddie's stock.

Now what

Fannie Mae and Freddie Mac serve key roles in the U.S. housing market. Together, they guarantee about half of the country's mortgages, thereby making it more affordable for millions of people to purchase homes. So while the Trump Administration wants to have these housing-finance titans stand on their own, once again, it needs to be done prudently so as to not have dire ramifications for a housing market that accounts for more than 15% of the nation's economy, as measured by gross domestic product. That's likely to take time -- and perhaps longer than many investors currently expect.

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Joe Tenebruso 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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