Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) stocks have taken a beating in the last few days, falling to their lowest level since March (currently $3.57) and Rafferty Capital Markets VP of equity research Richard Bove argues that the recently released liquidity coverage ratio rule is reason why.
“The decline in the stock has nothing to do with its fundamentals. It has nothing to do with new legislative thrusts. There have been no legal developments,” writes Bove in a September 4 note. “The only reason that I can determine that the stock is being pounded is financing.”
Fannie Mae securities not listed as a high quality liquid asset
The liquidity coverage rule requires banks to hold enough cash and other high quality liquid assets (HQLA) to last 30 days so that they will survive a market shock (or at least give regulators enough time to react if they won’t), but HQLAs only included cash, Treasuries, and Ginnie Mae securities – Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) securities were conspicuous in their absence. If banks can’t count those agency securities toward the liquidity coverage rule than there is much less incentive to hold them and Fannie Mae financing costs will likely go up in the future.
The other change is that FHFA director Mel Watt wants Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) to start issuing joint debt, which Bove expects to increase financing costs for Fannie Mae and decrease them for Freddie Mac, but this seems to be a secondary concern for the market. Freddie Mac has fallen by roughly the same amount over the last two days, so concerns about the liquidity coverage ratio are the more likely culprit.
New regulations would affect Fannie post-conservatorship
Bove argues that Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) shouldn’t be forced to pay more in funds in the near term since it’s going to remain in government conservatorship for the foreseeable future, but anyone who is currently invested in the agency is already betting either that it will eventually leave conservatorship more or less intact. If the regulatory landscape changes such that Fannie would leave conservatorship only to find itself at a marked competitive disadvantage, that bet might not be quite so enticing.