“Big Short” Bury: The rift in the US property market is still betting on Fannie Mae (FNMA.US) and Freddie Mac (FMCC.US)

The Zhitong Finance App learned that despite the sharp drop in FNMA.US (FNMA.US) and Freddie Mac (FMCC.US) stock prices, the “big short” Michael Berry continues to hold shares in these two companies. He said that although the US real estate market is beginning to rift, potential government announcements may cause the two mortgage giants to revalue their valuations.

On Tuesday, Fannie Mae fell 9%, the worst single-day performance since June; Freddie Mac fell 8%, the biggest one-day decline since May.

PMI adjustments are “irrelevant”

Berry believes that the US Federal Housing Finance Agency (FHFA)'s decision on Tuesday to align Fannie Mae's personal mortgage insurance (PMI) policy with Freddie Mac may be a disheartening sign for shareholders.

The change allows loan service agencies to actively contact eligible Fannie Mae borrowers to guide them to cancel the PMI after the home's net worth reaches a certain level, a practice that Freddie Mac has previously allowed. FHFA Director Bill Poulter said that as a result, borrowers can “stop paying unnecessary insurance costs and keep this money.”

However, Burry believes that this relatively mild policy change may suggest that greater action against the two mortgage giants will not come anytime soon. He said, “I think the announcement to bring Fannie Mae closer to Freddie Mac may have sent a signal that there will be no progress in this storm in the short term.”

Barry agreed that the change was “irrelevant,” but added, “Maybe there are other things happening that we don't know about.” Although limited progress is expected in the near future and agrees that the next political catalyst may come after the midterm elections, he said he is not considering reducing his holdings.

Burry warns: the US property market is beginning to rift

As Bury issued the warning, the average 30-year fixed interest rate in the US reached 7.22% on Tuesday. Existing home sales fell 2% in August to a 14-month low, yet median prices rose 1.6% year over year. In the new housing market, the median price in July fell 0.9% year on year to $393,800, the lowest since July 2021.

“I think the real estate market is starting to have some problems. Housing prices may have begun to fall,” Burry said. “But I don't think the real estate market will trigger a second global financial crisis.” He warned that a further rise in interest rates could break the mortgage interest rate lock-up effect, which has been making many homeowners reluctant to move.

“Higher interest rates may cause homeowners to do all kinds of ridiculous acts, such as refinancing before interest rates rise further, or selling homes before interest rates rise further,” he said. A Nashville real estate agent pointed out that there were about 5,400 homes for sale in August, while about 820 units were sold and 900 units are pending. Burry said he was “shocked” by the oversupply of housing in Nashville, adding that this is probably the highest record in the city's history.

Airbnb (ABNB.US) CEO Brian Chesky emphasized the broader US housing shortage problem on Tuesday evening, announcing a $250 million housing plan, and pointing out that the US still needs more than 5 million housing units.

It is worth noting that the Federal Reserve will announce the interest rate decision on Wednesday at that time. Any interest rate path signal may further affect mortgage affordability and housing activity. Currently, the probability that the market expects an interest rate hike of 25 basis points has exceeded 94%.

Why isn't Bury selling it? Waiting for a government announcement that could change everything

Burry said he considered buying more houses on Tuesday, Limey and Freddie Mac, but ultimately decided to wait. “The current situation may be that some factors we are unaware of are affecting stock prices,” he said. “The chart looks terrible, and I think momentum traders need to exit before stocks can stabilize.”

But he doesn't plan to sell it. Burry said that the risk of trying to exit and buy back the stock was to miss the government's decision to change this investment. “There is a strong psychological bias that makes people not want to take too many positions in these stocks because world-changing announcements can come anytime,” he said. “I've always held it, but I only increased my holdings slightly this fall.”

Key risks hanging over Fannie Mae and Freddie Mac

Since September 2008, Fannie Mae and Freddie Mac have been operating under the supervision of the US government. The US Treasury holds senior preferred shares, which have priority in settlement order over sub-preferred shares and common shareholders, and also holds warrants to buy 79.9% of each company's shares at nominal prices.

These preferred stock liquidation claims (recently valued at $350 billion) are shareholders' biggest concern. Unless that claim is curtailed, cancelled, or converted on favorable terms, common shareholders' equity may be substantially diluted. When asked if the stock price would fall to an all-time low, Burry replied, “If premium preferred stock liquidation claims aren't cut or removed, then yes.”

In March of this year, Barry estimated that if a compromise is reached, allowing the US Treasury to reserve about 25% of the claims, Fannie Mae's stock price could be around 15 US dollars, and Freddie Mac's high range of about 10 US dollars to around 20 US dollars. In July, he said that a more favorable solution may initially push common stock prices three to four times, and may increase six to seven times in the long term, which is already factored into the dilution of warrants.

On Stocktwits, retail investors have a “bullish” attitude towards Fannie Mae and a “neutral” attitude towards Freddie Mac. In contrast, Tipranks data shows that overall, Wall Street analysts gave Fannie Mae a “holding” rating, with an average target price of $7.65; giving Freddie Mac a “moderate buy” rating, the average target price was $9.17.

Since the beginning of the year, Fannie Mae and Freddie Mac have declined by 53% and 55%, respectively.