Rafferty Capital Markets analyst Richard X. Bove offers his opinion on the continuing Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) saga.

Fannie Mae

The fate of Fannie Mae is up to the courts

The Wall Street Journal reports today that the fate of Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) is up to the courts. Moreover, the Journal is suggesting that shareholders will win and the government will lose.

The plaintiffs in this action are accusing the government of unlawfully seizing private property without the due course of law. The basis of this claim is that the U.S. Treasury Department effectively nationalized the company through its so-called third amendment.

Treasury claims that all profits of Fannie Mae belong to the treasury

Under this amendment the Treasury claims that all profits of Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) belong to the Treasury even though the initial move by the Congress to put Fannie Mae into conservatorship made no such claim. In fact, it suggested the opposite – i.e., that the government would return the company to its shareholders at a future date.

The plaintiffs are also upset that the third amendment requires the elimination of Fannie Mae’s capital by 2017 and the reduction of its mortgage holdings to $250 billion by that date.

While it is possible that the plaintiffs will win their case, it is not clear what the U.S. government will do if it loses. In the Winstar cases related to the savings and loan industry, one might argue that the U.S. government ignored the ruling of the Supreme Court.

I continue to believe that the only realistic solution for the Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) dilemma is for Congress to explicitly state that the company would be returned to its former status. The rationale for this would be that if Fannie Mae and its brother GSE were eliminated so would the 20 and 30 year fixed rate mortgages. No one would buy them. This would create a crisis in the housing markets.

In sum, the pressures are building to return this company to its owners. This would be a bonanza for its stockholders.”

Fannie Mae