Despite significant share price declines, renowned investor Michael Burry maintains his stakes in both Fannie Mae (FNMA.US) and Freddie Mac (FMCC.US). While acknowledging emerging fissures in the US housing market, he believes a potential government announcement could trigger a major revaluation of these mortgage giants. On Tuesday, Fannie Mae shares dropped 9%, marking their worst single-day performance since June, while Freddie Mac fell 8%, its steepest daily decline since May.

PMI Adjustment Deemed 'Irrelevant'

Burry suggests the Federal Housing Finance Agency's Tuesday decision to align Fannie Mae's private mortgage insurance policies with those of Freddie Mac may signal something discouraging for shareholders. The change enables loan servicers to proactively contact eligible Fannie Mae borrowers about canceling PMI once sufficient home equity is established, a practice Freddie Mac already allows. FHFA Director Bill Pulte noted borrowers could thus "stop paying for insurance they don't need and keep that money." However, Burry interprets this relatively modest policy shift as potentially indicating that larger actions regarding the two mortgage giants won't materialize soon. He stated, "I think the announcement bringing Fannie closer to Freddie may signal this saga won't see progress anytime soon." While agreeing the change is "irrelevant," he added, "Perhaps there are other things happening that we don't know about." Despite expecting limited near-term developments and acknowledging the next political catalyst may arrive after the midterm elections, Burry indicated he has no intention of reducing his positions.

Burry Warns of Emerging Cracks in US Housing

Burry's warning coincides with the average 30-year fixed mortgage rate reaching 7.22% on Tuesday. Existing home sales fell 2% in August to a 14-month low, though median prices still rose 1.6% year-over-year. In the new home market, July median prices declined 0.9% year-over-year to $393,800, the lowest level since July 2021. "I think the housing market is starting to show some problems. Home prices may have already begun to decline," Burry remarked. "But I don't believe the housing market will trigger a second global financial crisis." He cautioned that further rate increases could break the mortgage rate lock-in effect that has kept many homeowners from moving. "Rising rates might push homeowners to do all sorts of irrational things, like refinancing before rates climb higher or selling before rates rise further," he said. A Nashville real estate agent noted approximately 5,400 homes were listed for sale in August, compared to around 820 sold and 900 pending. Burry expressed being "shocked" by Nashville's housing oversupply, calling it potentially the city's highest ever recorded. Notably, Airbnb CEO Brian Chesky highlighted the broader US housing shortage Tuesday evening, announcing a $250 million housing initiative and stating the nation needs over 5 million additional homes. The Federal Reserve's rate decision was scheduled for Wednesday, with any signals on the rate path potentially impacting mortgage affordability and housing activity. Market expectations currently show over 94% probability of a 25-basis-point hike.

Why Burry Isn't Selling: Awaiting a Potential Game-Changing Government Announcement

Burry revealed he considered adding to his Fannie Mae and Freddie Mac positions on Tuesday but ultimately decided to wait. "The current situation may be that unknown factors are affecting the stock price," he said. "The charts look terrible, and I think momentum traders need to exit before the stock can stabilize." Nevertheless, he has no plans to sell. Burry explained the risk of exiting and attempting to repurchase is missing the government decision that could transform this investment. "There's a strong psychological bias against being underweight these stocks because a world-changing announcement could come at any time," he stated. "I've held throughout, just adding slightly this autumn."

Key Risks Hanging Over Fannie Mae and Freddie Mac

Both Fannie Mae and Freddie Mac have operated under US government conservatorship since September 2008. The Treasury holds senior preferred shares with liquidation priority over junior preferred and common shareholders, along with warrants to purchase 79.9% of each company's common stock at nominal prices. The liquidation preference on these preferred shares, recently valued at approximately $350 billion, remains the primary concern for shareholders. Unless this claim is reduced, eliminated, or converted on favorable terms, common shareholders' equity could face significant dilution. When asked whether the stock could reach historical lows, Burry responded, "If the senior preferred liquidation claim isn't reduced or eliminated, then yes." In March, Burry estimated that under a compromise scenario where the Treasury retains roughly 25% of its claim, Fannie Mae shares might trade around $15, with Freddie Mac in the high teens to low $20s. In July, he suggested a more favorable resolution could initially drive common stock prices up three to four times, potentially six to seven times long-term, accounting for warrant dilution. On Stocktwits, retail sentiment toward Fannie Mae is "bullish," while Freddie Mac is viewed as "neutral." In contrast, Tipranks data shows Wall Street analysts collectively rate Fannie Mae as "Hold" with an average price target of $7.65, and Freddie Mac as "Moderate Buy" with an average target of $9.17. Year-to-date, Fannie Mae and Freddie Mac have declined 53% and 55%, respectively.