Valuing FNMA Common (Conservative Assumptions)...
In my opinion, Putbacks, DTAs etc are just noise and it would just be used to define when FNMA becomes netzero from tax payer perspective. Bigger factor is capital required per Basel III and Dodd-Frank. Here is a back-of-the-envelope calculation based on my rough assumptions--
-Based on assumptions for putbacks, DTAs and house price growth, it would seem like we would be net Zero 2014 Q1. At that point, in my opinion, Govt. would resume dividends on Preferred stock and exercize the warrant and sell 79.9% ownership of common in capital market to raise capital. That would be used to support the capital requirements per Basel III or Dodd_frank.
- Rough run quarterly run rate of profits based on past 2 quarters not counting one-time gains like DTA is about 8 billion/qtr. That might be overstated a bit due to writing-off loan loss reserves, etc. A 5 billion a quarter or 20 Billion per year earnings rate is more likely. Using that as assumption,
Earnings before Pref Dividend = $20 Billion/yr
Pref Dividend = $2 billion
Earnings available to Common = 18 Billion
At 8 PE, market value= $144 billion
79.9% to be owned by new shareholder per IPO, so current FNMA holders get 20% of 144 billion or 28-29 billion in market value.
Common share outstanding= 1.2 billion
Price of FNMA= 28/1.2= $23/shr
Tier-1 capital of new comany= $144+30 Billion perf=$174 billion
3.2 trillion balance sheet requires 5-6% capital and $174 billion should provide enough capital cushion.
Freddie comes even higher around $25+ with similar ASSUMPTIONS..
