Why Fannie And Freddie Have A Path To Survival

While most U.S. companies are hoping for an earnings boost from tax reform, Federal National Mortgage Association (OTC: FNMA) and Federal Home Loan Mortgage Corp (OTC: FMCC) are simply hoping to survive. According to one analyst, reports on a newly-drafted Senate housing finance reform bill are good news for Fannie Mae and Freddie Mac investors.

The Analyst

Height Securities analyst Edwin Groshans.

The Thesis

Groshans says the current draft of the housing finance bill allows Fannie and Freddie to continue to exist in conservatorship until other competitors enter the MBS guarantee market.

“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, Senator Bob Corker (R-TN), and House Financial Services Committee Chair Jeb Hensarling (R-TX) appear to be working together to develop or support bipartisan housing finance reform legislation,” Groshans wrote Thursday.

Details on the bill are still unknown at this point, but Groshans said it appears as if Fannie and Freddie may be allowed to exit conservatorship at some point down the line. Treasury Secretary Steven Mnuchin has said housing finance reform will be a top priority of the current administration in 2018.

In November, Bloomberg reported the Treasury has been discussing having Fannie Mae and Freddie Mac retain a portion of the fourth-quarter dividend payments in an effort to begin recapitalizing the government-sponsored enterprises.

Fannie and Freddie have about $7 billion in dividend payments due to the Treasury by the end of the year, but Bloomberg reported they may be allowed to retain $2 to $3 billion, another positive step for Fannie and Freddie investors.

Price Action

Despite the potential positive developments, the market seems to have little optimism for Fannie and Freddie at this point. Both stocks are down more than 2.3 percent in the past month and are down more than 23 percent year-to-date.

Related Links:

Fannie And Freddie Watch: The Latest News Out Of Washington

Bill Ackman: Fannie, Freddie Have Increasing Odds Of A Positive Resolution