Fannie Mae-No Politics (FNMA)

[Barrario]

Fannie and Freddie reported continued earnings growth in their core single-family guarantee businesses in the second quarter. Guarantee fees charged on newly issued mortgage backed securities continued to increase along with the size of their guarantee portfolios, while underlying credit losses remained modest. Both enterprises have now increased their capital reserves to the $3 billion per entity limit imposed by Treasury (TSRMF) in December, and plan to pay a combined $6.1 billion in dividends to Treasury under the net worth sweep by September 30th. Inclusive of these upcoming payments, Treasury will have received a total of $286 billion in dividends on its Senior Preferred Stock investment, which is $94 billion more than its cumulative cash investment of $191 billion. This represents an annualized cash-on-cash return to the government of nearly 11%, above the bargained for 10% interest rate. This return reflects no value for Treasury’s warrants to purchase 79.9% of the common stock of both entities, which we believe should be worth in excess of $150 billion if Fannie and Freddie exit conservatorship and are recapitalized.