Burry considered adding shares but is waiting for momentum traders to exit before the stocks stabilize.
- Burry viewed Fannie’s PMI policy change as a possible sign that broader government action is still distant.
- He warned that housing is starting to “creak” as mortgage rates hit 7.22% and sales weakened.
- Treasury’s $350 billion senior preferred claim is the make-or-break risk for common shareholders.
“The Big Short” investor Michael Burry is staying invested in Fannie Mae (FNMA) and Freddie Mac (FMCC) despite “terrible” charts, saying that a government announcement could revalue the mortgage giants even as the housing market begins to show cracks.
On Tuesday, FNMA fell 9% in its worst session since June, while FMCC dropped 8% in its steepest decline since May.
Burry Sees A Warning In Fannie’s PMI Change
Burry viewed the Federal Housing Finance Agency’s (FHFA) Tuesday decision to align Fannie Mae’s private mortgage insurance policy with Freddie Mac’s as a potentially discouraging sign for shareholders.
The change allows servicers to proactively contact eligible Fannie-backed borrowers and guide them through canceling PMI after their homes gain sufficient equity, which is a practice Freddie already permits. FHFA Director Bill Pulte said borrowers could thereby “stop paying for coverage you do not need and keep the money.”
Burry, however, saw the relatively modest policy change as a possible indication that no broader action on the mortgage giants was imminent. “I believe the announcement today to get Fannie more in line with Freddie may have sent a signal that there would be no movement in this saga anytime soon,” he told “Cassandra Unchained” subscribers.
Burry agreed with a subscriber who called the change a “nothing burger,” although he added: “Maybe something else is up that we cannot know.” Despite expecting limited near-term progress and agreeing that the next political catalyst may come after the midterms, he indicated that he was not considering trimming his position.
Burry Warns Housing Is Starting To Crack
Burry’s warning came as Mortgage News Daily’s average top-tier 30-year fixed rate reached 7.22% on Tuesday. August existing-home sales fell 2% to a 14-month low, although the median price remained 1.6% higher year over year. In the new-home market, July’s median price fell 0.9% from a year earlier to $393,800, its lowest level since July 2021.
“I think the housing market is starting to creak a bit. Housing prices might be falling already,” Burry said. “I do not see GFC 2 because of housing though.” He warned that further rate increases could disrupt the mortgage-rate lock-in that has kept many homeowners from moving.
“Higher rates may spook homeowners into all sorts of bizarre behaviors, like refinancing before rates go up more, or selling before rates go up more,” he said. After a Nashville real-estate broker pointed out that about 5,400 homes were for sale in August, compared with about 820 sold and 900 pending, Burry said he was “shocked at the oversupply in Nashville,” calling it potentially an all-time record for a city.
Airbnb CEO Brian Chesky highlighted the broader U.S. housing shortage late Tuesday, announcing a $250 million housing initiative and noting that the country needs more than five million additional homes.
The reading also comes amid the Federal Reserve’s policy meeting, which concludes on Wednesday, where any signal on the rate path could further influence mortgage affordability and housing activity.
Why Burry Is Not Selling FNMA And FMCC
Burry said he considered adding to his Fannie and Freddie positions Tuesday but decided to wait. “This is a situation where there may be developments we do not know about that are affecting the stock price,” he said. “Charts look terrible, and I think the momentum crowd needs to get out of the stock before it can stabilize.”
Still, he is not selling. Burry said attempts to exit and repurchase the shares risk missing the government decision that transforms the investment. “There is a powerful psychological bias to not want to be light on these shares because the announcement that changes the world could come at any time,” he said. “I have just been holding, adding a little bit on this fall.”
The Key Risk Hanging Over Fannie And Freddie
Fannie and Freddie have operated under government conservatorship since September 2008. Treasury holds senior preferred stock that ranks ahead of junior preferred and common shareholders, along with warrants to purchase 79.9% of each company at a nominal price.
Its senior preferred liquidation claim, recently valued at $350 billion, is the main issue for shareholders. Unless it is reduced, canceled or converted on favorable terms, common investors could be heavily diluted. When asked whether the stocks could revisit their all-time lows, Burry replied: “Yes, if the Senior Preferred liquidation claim is not cut or eliminated.”
In March, Burry estimated that a compromise leaving Treasury with about 25% of its claim could value Fannie in the mid-teens and Freddie in the high teens to low $20s. In July, he said a more favorable resolution could initially lift the common shares threefold to fourfold and potentially sixfold to sevenfold over time, including warrant dilution.
How Do Retail Traders Feel About FNMA And FMCC?
On Stocktwits, retail sentiment was ‘bullish’ for FNMA amid ‘high’ message volume, while FMCC sentiment was ‘neutral’ amid ‘normal’ message volume.
Over the past year, FNMA and FMCC have each plunged about 65%. Year-to-date, they are down 53% and 55%, respectively.
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