Rafferty Capital Markets’ Richard X. Bove weighs in on the ongoing Fannie Mae / Freddie Mac saga, commenting on an issue that Bruce Berkowitz raised.

Bruce Berkowitz raised an intriguing issue in one of our conversations concerning Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC). Mr. Berkowitz indicated that the receivable inherent in the GSEs mortgage put-back requests should be shown on the balance sheets of both companies. I agree.

By failing to show what the companies might gain if their demands for mortgage put backs are met, Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) are understating both their earnings and current book values. Roger Puerto of Fairholme put together the tables on this and the following pages in answer to the question as to what that receivable might be. First, this is what has been paid:

Fannie Mae, Freddie Mac Settlements

Second, this is what is expected to be paid if the banks that have been assessed actually pay 10% to 12% of the notional assessment:

Recovery rate

 

Fannie Mae and Freddie Mac’s payments demands

Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) have demanded payments from 13 additional banks. The notional amount requested is $134.3 billion. If one assumes that the GSEs will recapture 12% of the amounts noted, the receivable in question is $16.1 billion. However, the GSEs are expected to seek much more money from a broader list of banks.

PLS national

Accounting rules suggest that the potential recoveries may be indicated since Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) have already recovered $8.3 billion from these requests.

The Missing Receivable

Recovery rates