The Crapo-Johnson proposal to reform Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) is facing resistance in the Senate, and while it has enough support to get out of committee that’s probably the end of GSE reform until after the mid-term elections. Anyone who is thinking about making an investment will have to wait at least another year before it could start to payoff, either because of changing policy or a big court decision.

Fannie Mae Freddie Mac FHFA Federal National Mortgage Assctn Fnni Me (FNMA)

While he doesn’t say it explicitly, Rafferty Capital Markets VP of equity research Richard X. Bove seems to be holding out for the next president to change Treasury policy (which President Obama could do right now if he wanted).

Fannie Mae, Freddie Mac report 1Q losses because of income sweeps

Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) reported a $0.06 loss per share for the first quarter and Freddie Mac reported a loss of $0.15 per share, in both cases because of the preferred dividend paid to Treasury (107% of net income, in the case of Fannie Mae). Without the income sweep, Bove estimates that Fannie Mae would have earned $0.36 per share and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) would have earned $0.71 per share, beating Bove’s earlier estimates in both cases.

There are a few different different dynamics driving earnings for Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC). The yield on owned assets is still quite strong, but the second strongest asset class, mortgages, will decline by 15% per year according to Treasury policy, reducing both the overall yield on owned assets and the size of the companies’ portfolios, costing Fannie Mae $661 million and Freddie Mac $687 million in net interest income between 1Q14 and 4Q16.

But the trust/guaranty portfolio will become more profitable over the next few years as guaranty fees rise, possibly dramatically. “The increased spread will be applied to a growing guarantee portfolio. Overall, the increased contribution to earnings will be $2.1 billion. This is what will drive company earnings,” Bove writes while discussing Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA). Essentially the same argument applies to Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC), with an estimated gain of $794 million.

2014, 2015 EPS estimates revised down for both GSEs

Between these two trends, and the expectation that the loan loss provision will actually be a loan loss recovery, as it was in March of this year, Bove has revised his EPS estimates for Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) from $1.52 to $0.90 in 2014, from $1.51 to $1.07 in 2015, and from $1.32 to $.140 in 2016. He has similarly revised EPS estimate for Freddie Mac from $2.45 to $1.61 in 2014, from $2.15 to $1.97 in 2015, and from $2.83 to $2.24 in 2016.

“The new estimates assume that the Treasury’s policies remain in effect until 2016,” writes Bove.

Bove has gone on record multiple times saying that Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) are too important to eliminate, and that the tightening housing market is the first sign of what will happen if we try. Maybe by 2016 public opinion will have changed enough to turn GSE reform into a campaign issue.