After the Crapo-Johnson bill passed in the Senate Committee by a 13 to 9 vote, investors reacted negatively, sending shares of Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) down, as common shareholders feared their holdings would be worthless. However, many believe that the bill will never be signed into legislation. Richard Bove notes Fannie Mae / Federal National Mortgage Association (OTCBB:FNMA) will be heavily relied upon to restart the slowing housing, and it is unlikely that legislators will cut the GSEs.
Rafferty Capital Markets LLC’s Vice President Richard X. Bove in a recent report dated May 16, 2014 titled “Fannie Mae – Classic Buying Opportunity” provides several pointers to support his ‘buy’ thesis for Fannie Mae.
Factors aiding Fannie Mae
Bove points out that the Johnson-Crapo Bill got a favorable reading as the Senators likely cast their positive votes well aware that the bill would probably not picked up in the Senate until next year. The reason that 13 senators voted for the bill is likely because they didn’t want retiring Senator Johnson (D., SD) embarrassed in his last meaningful effort in the Senate, argues Bove.
Bove notes three Senators – Senator Shelby (R., AL), Senator Schumer (D., NY) or Senator Brown (D., OH) are likely to head the Senate Banking Committee next year, and all three voted against the bill. Apart from these three Senators, Senator Warren (D., MA) also voted against the bill. While Warren is not in the running for the banking committee chair, she is a serious candidate for the 2016 Presidential elections.
Below graphed out by Barclays analysts are the members of the Senate Banking Committee and their stance on the Crapo-Johnson bill:
Fannie Mae: Crucial pointers from Mel Watt, Janet Yellen
Richard Bove also draws attention to FHFA Director’s recent speech stating: “We’ll work to preserve and conserve Fannie Mae and Freddie Mac’s assets”.
Moreover, Fed Chairperson, Janet Yellen and Treasury Secretary, Jack Lew, indicated that a stronger housing market is imperative to stimulate economic growth. Richard Bove points out that if the Democrats want to retake the House of Representatives, they must run on a platform which promotes economic growth, which is heavily dependent on housing. Indeed, press reports have argued that Senator Harry Reid (D., NV) won’t bring this bill to the floor for discussion before the November elections.
Bove believes the Fannie Mae / Federal National Mortgage Association (OTCBB:FNMA) would remove more billions from the markets – economic growth would be hurt as if the secondary market shrunk. He points out that the Fed is not going to change its tapering program and start funneling more money into the purchase of mortgage-backed securities.
Thus Bove believes Fannie Mae / Federal National Mortgage Association (OTCBB:FNMA) would be heavily relied upon to restart housing, and its elimination is unlikely even after the Senate Banking Committee based Crapo-Johnson.
The following table captures Rafferty Capital’s projections on Fannie Mae:
Based on the above reasons, Bove believes Fannie Mae / Federal National Mortgage Association (OTCBB:FNMA) is a classic buying opportunity for investment institutions with a strong risk appetite.