How can big funds get into the GSE equity if they can't pick it up directly off OTC?
Good question. Consider this:
Big Firm/Fund picks up the phone and calls (as example) Pershing Square and says "We're looking to park some money for a few cycles can you spin up a fund for us. Make sure it has GSE stock in it, a lot of it." New shares of new fund are issued with a baseline NAV that trends to the common and preferred stocks. They even make an inverse based on shorting. It's directly correlated but not directly owned.
Big Firm/Fund says to Pershing Square "I'm feeling like your fund isn't balanced in a way we are comfortable with. We need you to pick up some more preferred. Oh by the way, we also want you to join the auction to buy some of the reperforming loans that Fannie/Freddie are selling out of their retained mortgage portfolio."
Best of both worlds. They get to help drain Fannie/Freddie's portfolio and they get to own their shares. They can't lose at this point.
This speaks to my broader suggestion earlier that Wall Street wants Fannie and Freddie to survive. They want them as the model for other charters and to rebirth them as a means to de-risk and create standardized mortgage liquidity processing infrastructure. Once those new charters begin doing what Fannie/Freddie do today, you will see lobbying to gut Fannie/Freddie into a utility platform. There is a reason they are already working on Common Securitization Platform and the Universal Mortgage Backed Security. These have now launched. Banks are looking well beyond the ability to have their own charters to compete with Fannie and Freddie. They are looking deep into the future at new and exotic financial instruments and derivatives based on the UMBS that can be bundled, packaged, traded, leveraged, and more.
The GSE companies will always exist, will always be vital to the US housing market, will always be reasonably profitable, and will eventually provide dividends back to shareholders. However, if the banks have it their way, the GSEs will slowly be boxed into a utility company for processing, bundling, and flowing securitizations.
If you want Fannie and Freddie to be the #1 company in the world, you will be disappointed. If you can be happy with a $25 to $100 share price and dividends of $1.5 to $2.5 per year, and to reach this possibly in a 3-5 year horizon, than this stock is for you.
But make no mistake, it is an almost inescapable destiny for the GSEs to eventually be morphed into back-end boring financial infrastructures to support other charters. This isn't scary or bad as long as the pps and the divs keep on rolling down to shareholders and private ownership rights are restored and protected.
AI
