Housing Finance Bill Critical for Fannie Mae and Freddie Mac
The Senate is reportedly working on a draft of a house financing reform bill that could have huge implications for Fannie Mae and Freddie Mac. Since 2012, all of Fannie and Freddie's profits have been turned over to the government under the terms of their bailouts during the financial crisis.
However, recent developments may finally have Fannie and Freddie on the path to independence once again.
The good news for Fannie and Freddie started in May when Federal Housing Finance Agency director Mel Watt said it would be irresponsible to keep the two government-sponsored entities under government conservatorship without recapitalizing them to provide a cushion in the event of another housing market downturn.
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There are few confirmed details of the Senate bill at this point, but Height Securities analyst Edwin Groshans says Watt will soon begin building this capital cushion by having Fannie and Freddie retain a portion of their earnings.
"There are many unknowns with regards to timing and capital requirements, but it appears that the draft bill will permit the GSEs to exit conservatorship at some point," Groshans says.
He says there is an 80 percent change the recapitalization will begin by mid-2018.
"This development is a positive for GSE shareholders, and we have an encouraging outlook on the probability of passage of a bill as Treasury Secretary [Steven] Mnuchin, Sen. [Bob] Corker and House Committee on Financial Services Chairman [Jeb] Hensarling appear to be working together to develop or support bipartisan housing finance reform legislation," Groshans says.
But just because a housing finance reform bill may be imminent, Fannie and Freddie investors may not be out of the woods just yet. Groshans says common shareholders could be in for some serious dilution when the Treasury exits its $187.5 billion stake in the two GSEs.
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Still, Fannie and Freddie investors are optimistic. In his most recent letter to investors, Pershing Square Capital Management CEO and Fannie and Freddie shareholder Bill Ackman said the two stocks have major upside.
"We believe that the current share prices do not reflect the significant momentum that continues to build for a bipartisan resolution of their status that would be highly profitable for the government and other shareholders," Ackman said.
Fannie Mae and Freddie Mac common shares were delisted from the New York Stock Exchange in 2010 but still trade on the over-the-counter market.
Wayne Duggan is a freelance investment strategy reporter with a focus on energy and emerging market stocks. He has a degree in brain and cognitive sciences from the Massachusetts Institute of Technology and specializes in the psychological challenges of investing. He is a senior financial market reporter for Benzinga and has contributed financial market analysis to Motley Fool, Seeking Alpha and InvestorPlace. He is also the author of the book "Beating Wall Street With Common Sense," which focuses on the practical strategies he has used to outperform the stock market. You can follow him on Twitter @DugganSense, check out his latest content at tradingcommonsense.com or email him at wpd@tradingcommonsense.com.
