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UPDATE 1-Fannie Mae, Freddie Mac shares tumble as Treasury overhaul plan disappoints

Michelle Price and Richard Leong

disappoints@ (New throughout, updates share prices, adds details, background and comments from analyst)

Sept 6 (Reuters) - Shares of Fannie Mae and Freddie Mac slumped on Friday, the day after the U.S. Treasury Department released a long-awaited plan to begin recapitalizing the mortgage giants and release them from government control.

Preferred shares of Fannie were down 4.7% in early trade and Freddie Mac preferreds slid about 5.1%. Analysts said investors were disappinted that 53-page report from Treasury left many questions unanswered such as concrete timelines or a specific recapitalisation plan.

The plan outlined a raft of recommendations for overhauling Fannie and Freddie, government sponsored entities, or GSEs, that have been in conservatorship since they were bailed out during the 2008 financial crisis.

This is the first major effort to jump-start housing finance reform after a 2012 attempt by the Obama administration. Washington has struggled to build a consensus for a plan to get them back on their feet.

"The Trump administration is clearly committed to recapitalizing the GSEs and ultimately ending the conservatorships, but there are still political and practical potholes on the road to resolving this issue," Isaac Boltansky, director of policy research at Washington-based Compass Point Research & Trading, wrote in a note on Wednesday.

The Treasury holds warrants representing 80% of Fannie and Freddies common stock, as well as senior preferred stock agreements that allow it to sweep the firms net quarterly profits into its coffers. That arrangement has left Fannie and Freddie, which guarantee over half the nations mortgages, with just around $3 billion of capital each, leaving taxpayers exposed to future bailouts.

Some investors, including a handful of hedge funds that have built stakes in both classes of stock and which have lobbied aggressively for housing finance reform, had hoped the Treasury would give the green light to end that arrangement and allow Fannie and Freddie to begin to retain earnings.

Instead, the report, recommended only that the government consider permitting them to retain more than the $3 billion in capital currently allowed, disappointing some investors.

"On the bearish front, this report did not signal the immediate end of the net worth sweep, was purposefully amorphous regarding the recapitalization process, and left many key questions unanswered," Boltansky said.

Fannie and Freddie's debt and mortgage backed securities did not react on Friday, suggesting investors in those assets did not expect the administration to drastically overhaul the market any time soon.

Either the market - this morning thinks that this is a splendid plan that will work, or it is skeptical/unsure that the current Administration will be able to break the 11-year long inertia of conservatorship, said Walt Schmidt, manager of mortgage strategies at FTN Financial.

(Reporting by Michelle Price, Alden Bentley and Richard Leong. Editing by Chizu Nomiyama and David Gregorio)