The battle over Fannie Mae and Freddie Mac and the net worth sweep has dragged on for many years, but progress toward a resolution is finally being made. It looks like their conservatorship is another step closer to ending, although there is still a long road ahead. In an interview, Tim Pagliara of CapWealth and Investors Unite told ValueWalk that the Federal Housing Finance Agency’s decision to halt the net worth sweep is an important step in the process.
Looking beyond the net worth sweep
Below is our 13F roundup for some high profile hedge funds for the three months to the end of March 2021 (Q1). Q1 2021 hedge fund letters, conferences and more The statements only include equity positions as 13Fs do not include cash and debt holdings. They also only include US equity holdings. Funds may hold Read More
"FHFA’s recent decision to halt the illegal Net Worth Sweep and allow them to rebuild capital means less exposure for taxpayers," he said. "It sets the stage for an end to the conservatorship and the adoption of reforms in housing finance. The law gives the Administration considerable authority to implement reforms."
Although some of the progress in the case of the government-sponsored enterprises may have discouraged some investors, the fact that the courts are on their side is definitely a good sign.
"The courts seem to be coming around to the conclusion that the Net Worth Sweep exceeded the statute," Pagliara said. "By extension, this means taxpayers and shareholders were ill-served by the arbitrary decision by unelected officials to use the GSEs’ profits as a slush fund."
Although a court ruled against the FHFA and net worth sweep, the FHFA has been moving forward as if nothing has happened. However, Pagliara still says progress is being made, even if it's hard to see it.
Tim Pagliara on court battles
"As long as there were multiple suits working their way through the courts and no consensus on a way to end the conservatorship, inaction was unavoidable," he explained. "I think the ice jam has been broken with the most recent ruling in Collins vs FHFA, and the decision to let the GSEs retain capital. But that does not mean the policymaking process is clear of all obstacles."
He also says it's high time the battle over Fannie Mae and Freddie Mac is settled.
"The conservatorship and the Net Worth Sweep has been a stain on the government for over a decade," he said. "On the other hand, internal reforms have the GSEs leaner and less prone to financial mismanagement. The economy is doing well and the GSEs will start building up buffer capital. I hope we can put this behind us."
In the long run, he does eventually expect things to get back to normal with Fannie Mae and Freddie Mac once they exit conservatorship. He explained why the GSEs are so crucial to the housing market.
"Investors have to believe the rule of law will be upheld in order to participate in markets," Pagliara said. "Solvent, well-run GSEs are likely to remain critical to keeping the housing finance market liquid and stable. No one has offered an alternative approach that has broad political support. Once the conservatorship ends and long-term policy changes are in place, the stability and predictability will facilitate rational investment decisions."
This article first appeared on ValueWalk Premium