By Michelle Price and Swa Herbst-Baylis
(Reuters) – The shares of Fanny May and Freddie Mack collapsed on Friday amid disappointment with the US Treasury's long-awaited plan to begin recapitalizing mortgage giants brought them back to private control after being rescued during the 2008 financial crisis.
The plan, released Thursday, outlines a number of administrative and legislative recommendations for Fannie and Freddie's overhaul, which guarantee more than half of all US mortgages and are known as government-sponsored organizations or GSEs.
Investors and analysts say the plan, presented in a 53-page report, left many questions unanswered, failing to provide the specific timeline or recapitalization plan that many had hoped for.
There was an expectation that they would never be met by this type of report, "Isaac Boltansky, director of research policy at Washington-based Compass Point Research & Trading, told Reuters on Friday. Although an important first step in the long road to a major overhaul of Fanny and Freddie, the report "delivered less than what some investors had hoped," he added.
In March, President Donald Trump asked the Treasury to quickly develop a major overhaul plan to Fanny and Freddie, the first big effort and housing reform begins after the Obama administration's unsuccessful attempt in 2012.
Many investors had high hopes that the plan, led by Treasury Secretary Steve Mnuchin, would recommend swift and bold actions to recapitalize Fannie and Freddie, remove them from the conservatory and start making private equity gains.
While the Treasury holds warrants representing 80% of Fannie and Freddie common stock, as well as senior preferred stock, a handful of hedge funds vets also hold shares in both classes of securities. They lobbied the Trump administration for housing reform, arguing that the conservatory allowed the Treasury to seize Fanny and Freddie's profits illegally. Some hedge funds have filed a lawsuit against the government for the conservatory.
Investors in hedge funds in Fannie and Freddie include William Ackman's equity management in Pershing Square, Bruce Berkowitz's Feisholm Fund and John Paulson's Paulson and Co., according to people familiar with the matter. Berkowitz wrote to his shareholders at the end of July, arguing: "Now is the time Fanny and Freddie … retain their profits properly, recapitalize and leave the Conservancy."
Ackman, whose fund holds both ordinary and preferred stock, he wrote to his investors last month, saying he was "disappointed" by what he sees as a delay in the Treasury's plan, but that he is optimistic that the administration's priority is to end conservation and recapitalize GSE.
Hedge funds were immediately available for comment on Friday while other investors said they were still adopting the plan. Some analysts and investors were skeptical that Congress would accept the Treasury's call to undertake comprehensive housing reform, expecting instead only gradual administrative changes.  "The stock market was obviously disappointed," said another hedge fund manager with stakes in the companies that declined to be identified. "I think the market as a whole is discounting parts of the report that would require legislative approval."
NO CAPITAL PLAN
Many investors hoped that the Treasury would provide a clear recapitalization plan that would allow mortgage companies start to retain most of their income. In particular, they hoped that the Treasury would recommend the termination of an agreement authorized under preferred stock agreements, whereby the Treasury would transfer Fannie and Freddie's net quarterly profits into its treasury.
However, the report only recommends that the government consider the authorization. "they keep more than $ 3 billion in current capital, adding that any capital plan will have to be carefully negotiated with the Federal Housing Financing Agency, which oversees the couple.
" On the Bear Front, don't report this the immediate end of the inaccurate assessment was deliberately amorphous to the recapitalization process and left many key questions unanswered, "Boltanski wrote in a note on Friday.
Despite such disappointment, the excitement born of the administration's pledge to tackle housing finance reform, it has already won awards for some hedge funds, with preferred shares in Fannie and Freddie close to d 67% for the year.
In August, Ackman said that securities gains this year helped increase the strong return on the Pershing Square Holdings Fund, which this year gained 54%.
(Reported by Michelle Price, Alden Bentley, Richard Leong and Svea Herbst-Baylis; Editing by David G, Steve Orlofsky, and Tom Brown)