What's Next For Fannie And Freddie? Here's What We Know So Far

A draft Senate bill addressing housing finance reform bodes well for Federal National Mortgage Association (OTC: FNMA) and Federal Home Loan Mortgage Corp (OTC: FMCC), according to a Washington analyst. 

The Analyst

Height Financial Services' Edwin Groshans.

The Thesis

Fannie Mae and Freddie Mac's outlook "improved significantly" amid multiple reports of a draft Senate bill that's likely to be released in the next two to four weeks, Groshans said in a research report. A copy of the draft isn't yet public, but some details are known, including:

The GSEs, or government-sponsored enterprises, will either lose their charters or the charters will be limited.

The entities will be considered guarantors and regulated by the Federal Housing Finance Authority.

The regulation will likely be modeled after the Federal Energy Regulatory Commission regulation, which covered pipeline companies that are allowed to earn a pretax return up to 13.5 percent, the report said. The bill is dissimilar to the 2013 bill drafted by Sens. Bob Corker (R-TN) and Mark Warner (D-VA), which became the Johnson-Crapo bill.

"We expect the GSEs will continue to operate in conservatorship until they are recapitalized," Groshans wrote. "There are very few details about recapitalization and exiting conservatorship. This leads us to believe that the bill will not directly address these issues but rather leave them in the hands of FHFA and Treasury."

The bottom line from Groshans: the most likely outcome in the Senate bill is that "GSEs look likely to remain in existence."

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