There is a potentially negative issue, though..... this settlement makes 'Fannie' look bad....not the government......Could this strengthen the governments case for yanking them into conservatorship? The government could say that Fannie and Freddy were misleading people, so they had to take action......
Fannie, Freddie Bulls Finding New Reasons to Get Behind the Stock
BY Dan Freed 10/24/14 - 01:39 PM
NEW YORK ( TheStreet) -- Mortgage giants Fannie Mae (FNMA) and Freddie Mac (FMCC) are like the Guantanamo Bay prison: the Obama administration has wanted to shut them down for years, but can't quite figure out a way to do it.
Since the 2008 financial crisis, when the government bailed out Fannie and Freddie, the two agencies have remained integral to a functioning mortgage market. That's why government efforts to wind down the two institutions have gone nowhere. It may also be why the shares have bounced back in recent days after a stunning legal decision on Sept. 30 that sent the common shares of both companies tumbling by 40%.
The investments later won support from Pershing Square Capital Management's Bill Ackman, climbing some 20% on Oct. 13 after the hedge fund manager told Bloomberg that he had bought more shares of the two stocks despite the legal defeat.
Fannie shares were up 1.32% to $2.31 on Friday afternoon while Freddie was trading at $2.23, up .9% on the day and more than 50% from lows set on Oct. 2 following the U.S. District court decision in which Justice Royce Lamberth threw out several shareholder lawsuits against the U.S. government. Shareholders, including Fairholme Funds and Perry Capital, are appealing that decision, however, and several other related cases, including a lawsuit brought by Ackman, are pending.
Many investors had been relying on the courts to restore their rights to a share of Fannie and Freddie profits, taken away by a 2012 amendment to the Treasury's 2008 preferred stock purchase agreement (PSPA) in those government sponsored entities (GSEs). The amendment swept all the GSEs profits into the Treasury, minus a minimal capital cushion.
"No one knows where all the lawsuits go," wrote Rob Zimmer, a former Freddie Mac lobbyist who now runs his own public affairs firm, TVDC, in an email exchange. "Investors could lose them all. But then we're back to square one: what do you do with investors in these profitable companies?"
While several bills have been introduced in Congress to wind the GSEs down and eventually close them, none of the bills have been able to gather enough support to warrant a vote by the full House or Senate, to say nothing of passing both chambers. Analysts are now predicting legislative action to determine the fate of Fannie and Freddie could be at least three years away.
In the meantime, the U.S. government, led by Fannie and Freddie, continues to be virtually the only game in town when it comes to guaranteeing new mortgages.
Some commentators are now urging Fannie and Freddie's regulator, the Federal Housing Finance Agency, bypass Congress and take the entities out of conservatorship.
The first step to doing this would be to build capital in Fannie and Freddie, allowing them to keep more of their profits instead of giving the bulk of them to the Treasury as it is required to do as per the 2012 amendment to the PSPA.
In other words, it would require the FHFA to break the rules governing the Treasury's investment.
FHFA spokeswoman Corinne Russell declined to comment on whether the FHFA would move to end GSE conservatorship on its own without waiting for Congress to decide Fannie and Freddie's fate.
That may sound implausible, but Rafferty Capital Markets analyst Dick Bove, who has been bullish on Fannie and Freddie shares, points to the law governing the U.S. conservatorship of Fannie and Freddie, the Housing and Economic Recovery Act of 2008 (HERA). It requires the FHFA as conservator to "ensure that each regulated entity operates in a safe and sound manner, including maintenance of adequate capital and internal controls."
The FHFA "can't create one company that's going to be ensuring trillions of dollars' worth of mortgages without having any capital. The company has to have capital, and for the company to have capital it's got to have shareholders," Bove said in an interview.
While Fannie and Freddie set aside a portion of profits as a reserve against potential losses, that number shrinks annually until it hits zero in 2018.
"Because we are permitted to retain only a limited and decreasing amount of capital reserves through 2017, we may not have sufficient reserves to avoid a net worth deficit if we experience a comprehensive loss in a future quarter," states Fannie Mae in its 2013 10-K report to shareholders.
However, pursuant to its 2008 investments in Fannie and Freddie, the Treasury would make up any deficit were Fannie and Freddie to experience one. That agreement may be enough to give the FHFA confidence that it has fulfilled its obligations under HERA.
Still, any move by the FHFA to build capital in Fannie and Freddie independent of the Treasury backstop would undoubtedly send shares surging higher, never mind what is happening in the courts.
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