Walker & Dunlop to benefit from stronger GSE volumes, says Keefe Bruyette
Keefe Bruyette says Friday's Commercial Mortgage Alert characterized Fannie Mae (FNMA) and Freddie Mac (FMCC) as 'leaning in on price and structure' to gain market share, with some sources saying they aim to achieve this year's lending caps. The article also cites data from Recursion, showing Fannie Mae's volumes through May at $22.8B, up 48% year-over-year, while Freddie Mac is cited as flat year-over-year through April, the analyst tells investors in a research note. Keefe believes that while macro uncertainty is a risk, stronger government sponsored entity volumes benefit Walker & Dunlop (WD) in particular, as well as Arbor Realty (ABR), CBRE Group (CBRE), JLL (JLL), and Newmark (NMRK).
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Mortgage rates, which track the 10-year Treasury yield, have recently been climbing again as growing concerns about the national debt and Trump's tariff policy have fueled fears of an economic slowdown. Democrats have criticized the Trump administration's plans to overhaul Fannie and Freddie. Last week's letter to Pulte, the Federal Housing Finance Agency director, accused the Trump administration of being primarily motivated by 'rewarding President Trump's billionaire campaign contributors.' 'We have serious concerns that you plan to make significant changes to the Enterprises in a way that would put investor profits over the homes of millions of Americans,' Senate Democrats wrote in the letter. There is also the question of whether it makes sense to release Fannie and Freddie into the public market in their current form, said Norbert Michel, a director at the Cato Institute, a libertarian think tank. 'This system of privatized profit and socialized loss is what led to the 2008 crisis in the first place,' Michel said. 'Under no circumstances should they be released as they were prior.' 'That was a bad system. We should not have that system,' he added. It remains unclear what exactly the Trump administration plans to do with Fannie and Freddie, which means it's also unclear whether hedge fund stakes, such as Ackman's, are worth anything at all. That's because, as part of the conservatorship agreement, the US Treasury owns a preferential stake in Fannie and Freddie that takes priority over all other shareholders: Fannie and Freddie must pay back a $190 billion debt to the government for its bailout assistance before it can exit its conservatorship, which would prevent other shareholders from making a profit. Ackman has advocated for the removal of the government's preferred shares, arguing that Fannie and Freddie have already paid back more money than it cost to bail them out. 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Taking the two mortgage giants public may be challenging, said Lori Goodman, a fellow at the Urban Institute, who has studied the history of Fannie Mae and Freddie Mac. Together, Fannie and Freddie's total net worth is more than $150 billion. Goodman estimates any public offering of Fannie and Freddie shares would likely eclipse the largest IPO in history: state-owned oil company Saudi Aramco, which raised $26 billion when it went public in 2019. 'This is an enormously complicated undertaking,' she said. Fannie and Freddie were never meant to permanently remain in a conservatorship arrangement, but Trump failed in an initial attempt to spin them off during his first administration. Investors are wagering that his next try will be successful. Shares of Fannie (FNMA) and Freddie (FMCC), which trade over the counter, surged after Trump was elected in November. In the last year, shares of Fannie's stock are up nearly 500% and Freddie's gained nearly 400%. Fannie and Freddie essentially grease the wheels of America's home lending market, one of the world's largest, by buying mortgages from lenders and repackaging them for investors. This helps enable a reliable flow of money to mortgage lenders, allowing them to offer more affordable rates to would-be homebuyers. Today, the mortgage giants guarantee more than half of America's mortgages, according to the FHFA. Goodman said she expects that any plan to take the companies public would lead to higher borrowing costs for homebuyers. The risk is that spinning off Fannie and Freddie could unsettle investors without the assurance of a government backstop, like the one provided during the 2008 crisis. In response, lenders might demand higher rates, especially from lower-income borrowers. 'You've got a trillion-dollar mortgage-backed securities market, both single-family and multi-family, that they're a critical part of,' Goodman said of Fannie and Freddie. 'You can't tamper with the government guarantee without upsetting that huge market.' Last month, Trump addressed the issue of the government's guarantee, writing on social media: 'I am working on TAKING THESE AMAZING COMPANIES PUBLIC, but I want to be clear, the U.S. Government will keep its implicit GUARANTEES, and I will stay strong in my position on overseeing them as President.' But a social media post might not be enough to assure investors in the multitrillion-dollar mortgage-backed securities market, Goodman said. It is possible that Fannie and Freddie could pay a fee to assure the government's guarantee long-term, but that cost would also likely be passed on to homebuyers, she added. Any rise in mortgage rates would likely be unwelcome news to prospective homebuyers, who have been grappling with elevated borrowing costs since the Federal Reserve hiked its benchmark interest rate in 2022 to combat inflation. Mortgage rates, which track the 10-year Treasury yield, have recently been climbing again as growing concerns about the national debt and Trump's tariff policy have fueled fears of an economic slowdown. Democrats have criticized the Trump administration's plans to overhaul Fannie and Freddie. Last week's letter to Pulte, the Federal Housing Finance Agency director, accused the Trump administration of being primarily motivated by 'rewarding President Trump's billionaire campaign contributors.' 'We have serious concerns that you plan to make significant changes to the Enterprises in a way that would put investor profits over the homes of millions of Americans,' Senate Democrats wrote in the letter. There is also the question of whether it makes sense to release Fannie and Freddie into the public market in their current form, said Norbert Michel, a director at the Cato Institute, a libertarian think tank. 'This system of privatized profit and socialized loss is what led to the 2008 crisis in the first place,' Michel said. 'Under no circumstances should they be released as they were prior.' 'That was a bad system. We should not have that system,' he added. It remains unclear what exactly the Trump administration plans to do with Fannie and Freddie, which means it's also unclear whether hedge fund stakes, such as Ackman's, are worth anything at all. That's because, as part of the conservatorship agreement, the US Treasury owns a preferential stake in Fannie and Freddie that takes priority over all other shareholders: Fannie and Freddie must pay back a $190 billion debt to the government for its bailout assistance before it can exit its conservatorship, which would prevent other shareholders from making a profit. Ackman has advocated for the removal of the government's preferred shares, arguing that Fannie and Freddie have already paid back more money than it cost to bail them out. Since entering conservatorship, the two companies have paid $301 billion in dividends to the Treasury. '(Fannie and Freddie) shareholders don't have their hands out. The opposite is the case,' Ackman wrote last week on social media. '(Fannie and Freddie) shareholders are simply seeking credit for payments that have already been made to the government so that a release from conservatorship can occur.' But financial analysts say investing in Fannie and Freddie is risky. 'At the moment, on an economic basis, the private shareholders' equity is about negative $200 billion, because that is what Fannie and Freddie owe the government,' said Bose George, a managing director at Keefe, Bruyette & Woods, a boutique investment banking company. 'Owning the shares is speculative because you're making an assumption that the government is going to forgive this debt.'
