According to Richard X. Bove of Rafferty Capital Markets, all the talk about the demise of Fannie Mae / Federal National Mortgage Association (OTCBB:FNMA) is highly overrated. He rightly points out that the ultimate fate of Fannie Mae is a political rather than an economic decision, and that the eventual fate of the organization is not decided by the open market or even economic factors, per se.
Bove’s argument on Fannie Mae’s survival
Bove also highlights the historical reality that politicians say one thing and mean and do another. He argues this is why Fannie Mae / Federal National Mortgage Association (OTCBB:FNMA) is almost certain to survive despite President Obama and the Democrats and Republicans lining up to see it wound down.
His argument is that any reasonably open-minded analyst would agree that Fannie Mae / Federal National Mortgage Association (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC), despite their many flaws and poor management, have served a positive purpose in assisting in the creation of a fair and largely accessible mortgage market for American consumers. Given this historical reality, and the fact that any kind of private sector-only mortgage loan system, no matter how carefully designed, will almost inevitably have a significant short- and medium term negative impact on small banks and the construction industry, Bove suggests closing down Fannie is politically DOA.
Bove also points out that Fannie Mae / Federal National Mortgage Association (OTCBB:FNMA) is in better shape than the public realizes. According to his analysis, “…if the company is allowed to grow it will attain a value that exceeds its estimated earnings per share.” The other side of the coin, however, is that if liquidated, shareholders will likely receive nothing.
Fairholme makes a play for Fannie Mae and Freddie Mac
On November 14, Fairholme Capital Management unexpectedly offered to acquire the insurance assets of the mortgage finance giants in a recapitalization deal valued around at $52 billion. Bruce R. Berkowitz, CEO of Fairholme, said the offer called for creating state-regulated private insurance companies to purchase, recapitalize and operate the current insurance businesses. Fannie Mae / Federal National Mortgage Association (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) and their with their federal charters would disappear, with “legacy investments” earmarked to repay the federal government for its $188 billion investment in the firms. Fairholme also reported owning around $3.5 billion in Fannie Mae and Freddie Mac preferred shares.
Ackman also bullish on Fannie Mae and Freddie Mac
Pershing Square Capital’s Bill Ackman has also turned bullish on Fannie Mae and Freddie Mac. The firm released two 13D forms on November 15th, confirming that Pershing Square has purchased almost 10% of both insurers’ common stock. Ackman did say, however, that the shares were definitely not risk-free as the boards of Fannie and Freddie are ultimately responsible to their conservator – the government – rather than shareholders.
