How To Invest In Fannie Mae's Comeback With Housing-Focused ETFs

Fannie Mae (Federal National Mortgage Association) (OTCQB:FNMA) and Freddie Mac (OTCQB:FMCC) might finally be headed for an exit from government conservatorship, almost 17 years after being taken over by the federal government in the 2008 financial crisis.

The two giant housing finance companies, long lingering in regulatory limbo, are again generating investor enthusiasm as word circulates that President Donald Trump is considering allowing them to return to public markets.

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With the over-the-counter stocks of Fannie and Freddie skyrocketing so far this year, up over 190% and 140%, respectively, investors are racing to figure out how to position themselves. Although there isn’t an ETF directly tracking these two government-sponsored enterprises (GSEs), multiple ETFs provide indirect exposure to the changing housing finance story.

The ETF Play: Indirect Exposure To GSE Reboot

No ETF actually owns shares of Fannie or Freddie, as they now trade over the counter and are still under federal control. But the following ETFs would potentially be affected by shifts in their status:

iShares MBS ETF (NASDAQ:MBB)

Exposure: Agency mortgage-backed securities

Why it’s relevant: Fannie and Freddie stand behind many MBS in the U.S. Shocks to their structure, credit health, or guarantees may affect valuations of MBS and yield profiles.

SPDR S&P Regional Banking ETF (NYSE:KRE)

Exposure: Mid-sized lenders

Why it’s relevant: The regional banks are significantly dependent on the GSEs to securitize mortgages and cover their lending risk. A change in Fannie and Freddie’s business model would impact their credit standards and liquidity.

iShares U.S. Financial Services ETF (NYSE:IYG)

Exposure: Broad financials, including mortgage lenders and insurers

Why it’s relevant: Large mortgage lenders and insurance players might feel knock-on consequences in terms of origination volumes, risk-sharing, and costs if Fannie and Freddie reverse their move back to public companies.

Why The Comeback Matters

Fannie and Freddie are instrumental in the U.S. housing market by buying mortgages from banks and aggregating them into securities. Fannie and Freddie mortgage-backed securities (MBS) are widely owned by banks, insurers, and institutional investors. Following the collapse of the housing market in 2008, the Federal Housing Finance Agency (FHFA) put both GSEs into conservatorship, and profits went directly to the U.S. Treasury.

Today, though, with the housing markets strained, discussions on terminating the conservatorship have revived. A restructured, publicly traded Fannie and Freddie could remake mortgage access, investor perceptions, and the fixed income universe.

As the conservatorship conversation heats up, so too will the spotlight on these ETFs. Because when the twin titans of housing finance make a move, even from the shadows, the entire market listens.

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