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A new article (payback time) helpful, positive opinion





http://www.fundweb.co.uk/opinion/vanessa-drucker-fannie-mae-and-freddie-macs-payback-time/2008387.article



Categories:Investments,US


Vanessa Drucker: Fannie Mae and Freddie Mac's payback time?

25 March 2014 | By Vanessa Drucker




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Binary outcomes are more often associated with options than with common or preferred stock investments. Yet both classes of government sponsored mortgage agencies, known as Fannie Mae and Freddie Mac, now stand to soar or collapse depending on the American government’s actions.

This chart illustrates the past year’s market reaction. Dick Bove, an analyst at Rafferty Capital Markets, estimates that Fannie common stock could rise to $18 a share, reckoning on the company now earning $1.60 per share, and applying a 10-12 multiple.






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Remember that in 2008, the government pumped $189.4bn collectively into the GSEs, which prop up about 90 per cent of the American mortgage market. In return, shareholders lost all rights to dividends, while the GSEs recuperated. By July 2012, both had become profitable and stopped drawing down from the Treasury.

Private investors were taking note, including a group holding over half of the $34.6bn outstanding in GSE preferred stock. In July 2013, led by Bruce Berkowitz of Fairholme Funds, the team sued the government and presented a further proposal in November to purchase and recapitalise the mortgage agencies.

Their plan involved converting their junior preferred stock, raising new capital in a rights offering, winding down the GSEs’ insurance and investment books, repaying Treasury with the proceeds and still delivering a profit to taxpayers. The common stockholders would ultimately reap the remainder.

The government is loathe to give up its cash cows for such juicy dividends or to be seen to reward private shareholders after a bailout. (But note: shareholders of AIG and the entire banking industry have done very nicely, thank you, despite Uncle Sam’s intervention.)

A new bill, introduced by senators Johnson and Crapo, focuses on another restructuring, with private capital covering the first 10 per cent of losses. That controversial legislation will likely stall this year though, ahead of the midterm congressional elections.

The GSEs still play a critical role in underwriting the housing







market and could be granted a reprieve, with more regulatory oversight and capital requirements. If they wither, it’s goodbye to longer-dated mortgages, Bove warns, noting that issuers will hesitate if the GSEs no longer exist as purchasers of the securitised packages.

Vanessa Drucker is the American editor of Fund Strategy magazine





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