Fannie Mae-No Politics (FNMA)

[Dollars1]

Richard X. Bove, Chief Strategist | [phone] | [e-mail]
VOL. 6 NO 3 JANUARY 22, 2019
CURRENT ISSUES
Last December, there were back-to-back commentaries in these Briefings concerning the future of Fannie Mae and Freddie Mac as a consequence of Mark Calabria being nominated by the President to become the new director of the Federal Housing Finance Agency. It was noted that if Mr. Calabria was approved by the Senate, there would be two results (See page 2).

FANNIE AND FREDDIE SET FREE
Money to Be Made


First, Fannie and Freddie would be spun out of their conservatorships and the preferred stockholders in these companies would get some of the dividends that they missed. This would push these stocks higher and, in fact, on Friday this is exactly what happened as the acting Director Joseph Otting intimated that the conservatorships would be brought to an end.
If Mr. Otting adheres to the Mark Calabria’s plan, these two companies would become traditional banks that focus on mortgage lending. It is believed that for this to happen, the holders of the junior preferred shares in both companies would be paid some of the dividends that they have missed going back to 2008.
There are two reasons that this may occur. First, the Federal Appeals Court in Washington ruled a
few years ago that there was a contractual relationship between the companies and these preferred shareholders. It requested that the lower Federal District Court determine what and how much should be paid to meet the terms of these contracts. The Federal District Court has done nothing but the Appeals Court ruling still stands.
More compelling, Mr. Calabria has written on this subject in the past. He argued forcefully that the government destroys its credibility if it ignores contractual relationships. He understands that if the two agencies are to gain the capital backing that they need to be successful, the money must come from the private sector. Therefore contracts must be honored by the government. The preferred shareholders must be paid back.
I continue to believe strongly that this will happen. The government cannot flagrantly ignore the laws of this country as it has done since 2012. Moreover, the housing industry needs Fannie and Freddie if it is to obtain the funding it needs.
High Risk to Follow
Once the two companies are set free the big question is will they obtain government backing for their loans. This is absolutely necessary. If it does not happen, the home finance industry will lose the 30-year fixed rate mortgage. This would devastate housing values. Rather than repeating what I have written on this subject, the first issue at hand is how much might the preferred shareholders expect.