Compass Point Research released a report on March 17th examining the chances for Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) reform bill to become law this year. Analyst Isaac Botansky’s conclusion was, despite the likelihood of the bipartisan Johnson-Crapo bill advancing from the Senate banking committee to the floor, that there is only a 5% chance that the bill will clear both houses of Congress and become law this year.
The overview of the report offers a summary of Boltansky‘s point of view. “The Senate Banking Committee leadership released Fannie Mae and Freddie Mac reform language on March 16. The discussion draft echoes the Corker-Warner proposal that was released in the summer of 2013 but is far more detailed. We continue to believe that there is not a path to passage for Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) reform in this Congress but note that the committee-level work ahead will undoubtedly influence the mortgage finance conversation in D.C. and therefore warrants attention.”
Breakdown of the Johnson-Crapo bill
The Johnson-Crapo bill has three main elements — (1) the resolution of the Fannie Mae and Freddie Mac; (2) the establishment of a Federal Mortgage Insurance Corporation (FMIC) which would guarantee loans and create a catastrophic insurance fund; and (3) a requirement that private capital take 10% losses before the guarantee kicks in.
Fannie Mae, Freddie Mac reform bill not “shareholder friendly”
Boltansky points out that the current proposal offers Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) junior shareholders no more hope of recovering significant value than than the bill considered last year did. “The Johnson-Crapo draft, similar to the Corker-Warner bill, requires actions that will maximize the return on the government’s senior preferred stakes in Fannie Mae and Freddie Mac which limits the path to recoveries for junior securities.”
Johnson-Crapo bill has good chance of approval by Senate banking committee
The report argues that given the bill has 12 sponsors on the 22-person Senate banking committee, there is a reasonably good chance the bill will advance out of committee. Passage is not, however, a foregone conclusion, and the size of the majority in the vote is an important consideration for the future of the bill on the Senate floor.