Maglan Capital has joined the ranks of hedge funds that think Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) are going to pay out, even if it takes a few years of winding through the courts before it happens. In a June 6 letter to investors, Maglan Capital chief investment officer Steven Azarbad and president David D. Tawil said that the fund had bought Fannie Mae and Freddie Mac common stock in early April.
“Maglan began investing after concluding that the prospect of near-term legislation altering the nature of the GSEs was unlikely and the progress on the various lawsuits was going to be positive in the medium term,” they write.
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Maglan Capital believes Fannie Mae, Freddie Mac too important to wind down
Maglan Capital’s thesis is fundamentally the same as prominent bulls like Richard Bove who argue that Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) are indispensable to the US housing market and that the government, which currently plans to wind them down, will eventually realize their importance and reverse course. Right now the GSEs are under conservatorship that is supposed to end when they return to financial health, but the Treasury Department has instituted full income sweeps that prevent this from ever happening.
The timing of Maglan Capital’s investment is interesting because it means that the risk of legislative action like the Crapo-Johnson proposal was serious enough that it was keeping sophisticated investors on the sidelines. Now that it has little chance of getting a vote in the Senate, let alone becoming law, a number of hedge funds are following Bill Ackman and Bruce Berkowitz’s lead and going long on Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC).
Fannie, Freddie lawsuits will have a bigger impact on preferred shareholders
Azaebad and Tawil also mention the shareholder lawsuits challenging the Treasury department’s full income sweeps of Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC), but this is less likely to impact their position. It’s true that the lawsuits are just now heating up, with discovery getting into full swing. If there are any bombshells to be found in Treasury and Federal Housing Agency documents, we’ll know in the next six months or so. But such information would mostly benefit preferred shareholders who have a specific claim for dividends that has been nullified by the income sweep. According to the Maglan Capital client letter, it’s purchased common stock, which doesn’t have the same claim.
The hedge fund managers sum up the argument stating:
The nearest legal events are expected to occur this summer when the courts are expected to rule on the pre-trial motion practice and the legal discovery is conducted. In light of the anticipated near-term positive catalysts, we positioned our investment to reap the greatest reward from these events, concentrating on the common stock of the GSEs.