One of the steps in the process to recapitalize and release Fannie Mae and Freddie Mac from conservatorship is to hold stock offerings. However, one analyst who has been critical of the Federal Housing Finance Agency and its director, Mark Calabria, for a long time believes those offerings have been put on hold indefinitely.
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Why Fannie Mae's, Freddie Mac's stock offerings may be on hold
In a note today, analyst Dick Bove of Odeon Capital said the disagreement over the capital rule makes a Fannie Mae's and Freddie Mac's stock offerings unlikely. Both government-sponsored enterprises sent letters to the FHFA explaining why they disagree with the capital rule as it was proposed by the agency.
Bove pointed out that the GSEs' opposition to the proposed capital rule was the first time they have ever publicly opposed the FHFA or questioned its actions since it was established in 2008 by the Housing and Economic Recovery Act. Thus, when they released letters criticizing the capital rule, it was a very serious matter.
The Odeon Capital analyst argues that the "immediate impact" of those letters was "to put on indefinite hold any offering of public stock by" both Fannie Mae and Freddie Mac.
Problems with the capital rule
The GSEs questioned the capital rule because they believe it violates the mandates they were given by Congress. Bove said they also believe the capital rule "hinders their ability to operate in a fashion that could provide investors with a reasonable return on their investments in the companies."
He also said the letters make it sound as if Fannie and Freddie believe the capital rule threatens their futures because it implies that they will have to raise prices on their mortgages. He believes that by raising their prices, they will lose business to the entities he sees as their primary competitors, which are the nation's biggest banks.
Further, he believes the higher prices will leave Fannie Mae and Freddie Mac with only the mortgages the big banks don't want, which are those made to low-income households. He believes the GSEs went public with their concerns because they weren't able to convince the FHFA in closed-door negotiations.
He also said the government has given Calabria "dictatorial powers," meaning no one can overrule him anywhere in the U.S., not even the president, supposedly. The Fifth Circuit Court of Appeals has already said it believes his position is unconstitutional.
Bove said Fannie and Freddie have effectively gone over Calabria's head and appealed directly to the public. He also said their arguments can't be ignored because they make sense. Philip Swagel of the Congressional Budget Office and former Freddie Mac CEO Donald Layton have expressed similar concerns.
The analyst added that now Fannie Mae and Freddie Mac will have to enter negotiations with the FHFA, which oversees them, which he believes puts their stock offerings on hold. He doesn't expect the results of the negotiations to be known for months.
He does believe the FHFA will yield on some of its demands, although he doesn't think that would necessarily be positive for Fannie Mae and Freddie Mac shares.
After Fannie Mae's and Freddie Mac's stock offerings
Bove believes that even after Fannie Mae and Freddie Mac are released from conservatorship and hold their stock offerings, the government will seek to control them. After reading the letters written by the GSEs, he believes the government wants to control all regulations related to their operations, thus controlling the companies themselves.
He believes policies will be made at the government level rather than the corporate level. As a result, he argues that investors should "understand that they will not be putting their money into a free-standing capitalist enterprise."
He argues that the government doesn't intend to let the GSEs choose the products they sell or the markets they can function in. He believes the government wants Fannie Mae and Freddie Mac to only serve the single-family housing market and to "have limited interface with any derivative financial instruments that could be created from the base products."
Bove also argues that the government wants the GSEs' fee schedules to be high, making them the high-cost producers in their industry. This would increase competition in the industry, supposedly enabling banks to swoop in at lower costs to take market share. He also believes it would mean that Fannie and Freddie would be pushed into offering high-cost loans to low-income buyers because the banks will take the best loans for themselves.