"Big Short" Burry: Cracks Appearing in US Housing Market, Still Betting on Fannie Mae (FNMA.US) and Freddie Mac (FMCC.US)

Despite the sharp decline in the stock prices of Fannie Mae (FNMA.US) and Freddie Mac (FMCC.US), "Big Short" Michael Burry continues to hold shares in both companies. He stated that although cracks are beginning to appear in the US housing market, potential government announcements could trigger a revaluation of these two mortgage giants. On Tuesday, Fannie Mae fell 9%, its worst single-day performance since June; Freddie Mac dropped 8%, its largest single-day decline since May. PMI Adjustment "Inconsequential" Burry believes that the Federal Housing Finance Agency's (FHFA) decision on Tuesday to align Fannie Mae's private mortgage insurance (PMI) policy with Freddie Mac's may be a frustrating signal for shareholders. The change allows loan servicers to proactively contact eligible Fannie Mae borrowers and guide them to cancel PMI once their home equity reaches a certain level, a practice Freddie Mac had already permitted. FHFA Director Bill Pulte stated that borrowers could therefore "stop paying for insurance they don't need and keep that money in their pockets." But Burry believes this relatively modest policy change may signal that bigger moves targeting the two mortgage giants will not be coming in the near term. "I think the announcement bringing Fannie Mae closer to Freddie Mac may have sent a signal that nothing is going to happen on this front anytime soon," he said. Burry agreed with the view that the change is "inconsequential," but added: "Maybe there are other things happening that we don't know about." While expecting limited near-term progress and agreeing that the next political catalyst may come after the midterm elections, he said he is not considering reducing his position. Burry Warns: Cracks Beginning to Appear in US Housing Market Burry's warning comes as the average top 30-year fixed rate in the US reached 7.22% on Tuesday. Existing home sales fell 2% in August to a 14-month low, but the median price still rose 1.6% year-over-year. In the new home market, the median price fell 0.9% year-over-year in July to $393,800, the lowest since July 2021. "I think the housing market is starting to have some problems. Home prices may have already started to decline," Burry said. "But I don't think the housing market will trigger a second global financial crisis." He warned that further rate increases could break the mortgage rate lock-in effect that has kept many homeowners from moving. "Rising rates could cause homeowners to do all sorts of crazy things, like refinancing before rates go even higher, or selling their homes before rates go even higher," he said. A Nashville real estate agent noted that about 5,400 homes were for sale in August, while about 820 sold and about 900 were pending. Burry said he was "shocked" by the oversupply of homes in Nashville, calling it potentially the highest level in the city's history. Airbnb, Inc. Class A (ABNB.US) CEO Brian Chesky on Tuesday evening highlighted the broader US housing shortage, announcing a $250 million housing initiative and noting that the US needs more than 5 million additional homes. Of note, the Federal Reserve will announce its rate decision on Wednesday local time, and any signal on the rate path could further affect mortgage affordability and housing activity. Current market expectations for a 25 basis point rate hike have exceeded 94%. Why Won't Burry Sell? Waiting for a Government Announcement That Could Change Everything Burry said he considered adding to his positions in Fannie Mae and Freddie Mac on Tuesday but ultimately decided to wait. "What's happening right now may be some factors we don't know about affecting the stock prices," he said. "The charts look terrible, and I think momentum traders need to exit first before the stocks can stabilize." But he does not plan to sell. Burry said the risk of trying to exit and buy back the stocks is missing the government decision that changes the investment. "There's a powerful psychological bias that makes you not want to be underweight these stocks, because a world-changing announcement could come at any time," he said. "I've held all along, and just slightly added to my position this fall." Key Risks Hanging Over Fannie Mae and Freddie Mac Since September 2008, Fannie Mae and Freddie Mac have been operating under US government conservatorship. The US Treasury holds senior preferred stock with liquidation priority over junior preferred and common shareholders, along with warrants to purchase 79.9% of each company's shares at a nominal price. These senior preferred liquidation claims (recently valued at $350 billion) are the primary concern for shareholders. Unless the claims are reduced, eliminated, or converted on favorable terms, common shareholders could face significant dilution. When asked whether the stock prices could fall to historic lows, Burry replied: "If the senior preferred liquidation claims are not reduced or eliminated, then yes." In March, Burry estimated that if a compromise were reached allowing the US Treasury to retain about 25% of the claims, Fannie Mae's stock could be around $15, and Freddie Mac's in the high teens to low $20s. In July, he said a more favorable resolution could initially drive common stock prices up three to four times, and potentially six to seven times over the long term, factoring in warrant dilution. On Stocktwits, retail investors are "bullish" on Fannie Mae and "neutral" on Freddie Mac. In comparison, Tipranks data shows that overall, Wall Street analysts give Fannie Mae a "Hold" rating with an average price target of $7.65; and Freddie Mac a "Moderate Buy" rating with an average price target of $9.17. Year-to-date, Fannie Mae and Freddie Mac have fallen 53% and 55%, respectively.