One of the reasons to invest in Fannie Mae and Freddie Mac is because they will soon be out of government control in the form of their conservatorships. However, there’s no denying that Fannie Mae and Freddie Mac will remain under some level of government control because of their prominent place in the housing industry.
A key question is how much control the government will retain over the government-sponsored enterprises after they exit their conservatorships. Federal Housing Finance Agency Director Mark Calabria made some comments during the virtual convention for the Mortgage Bankers Association this week that provided fodder for those who see no value in the GSEs' common shares.
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Calabria wants continued government control of Fannie Mae, Freddie Mac
In a note following Calabria's MBA speech, analyst Dick Bove of Odeon Capital said Calabria wants Fannie and Freddie to get approval from the FHFA for any new product they might want to offer in the future. He wants this government control over Fannie Mae and Freddie Mac to ensure that both companies live up to their stated purpose, which is to provide resources to support housing during stressful times.
Bove believes Calabria wants to ensure that the FHFA will continue to make all the rules for Fannie Mae and Freddie Mac if or when they become private companies, keeping them under government control. Calabria expects to lead the FHFA for at least three and a half more years, which Bove said means he is asking for "dictatorial power" over the two companies.
"This power would offset any controls that private shareholders would have should the two companies ever make another stock offering," Bove declared.
Competition in the housing finance market
Calabria also said he wants to make sure the GSEs operate in an environment in which they foster a free and fully competitive housing finance market. Bove believes Calabria is "very happy" that he "stepped the two companies from offering volume discounts." Bove believes this reduces their ability to compete on favorable terms, thus "shrinking their market share."
He's confused about Calabria's statements because Calabria is a Republican, and Republicans call for free and open markets. However, he has also proclaimed himself to be a Libertarian, which would normally mean that he doesn't like government control. Despite those two factors, he is calling for total government control over Fannie Mae and Freddie Mac, even after they are private, apparently.
Bove also believes Calabria is calling for government control of the housing market in the U.S. since the GSEs "set the tone for the whole $11 trillion housing finance market."
"Does the President or the Secretary of the Treasury know what he is proposing?" Bove exclaimed. "Does the Supreme Court, who is currently about to opine on the constitutionality of his position understand what he wants? Will the Supreme Court, which supposedly now dislikes bureaucrats from legislating, really allow this to happen?"
Preparing for earnings numbers
Calabria also told the MBA that the measures taken by the FHFA to protect homeowners and renters during the COVID-19 pandemic will cost about $6 billion. However, he did not say how that loss will be handled by the GSEs. Fannie and Freddie are expected to release their third-quarter earnings results within the next 10 days.
Bove noted that if this $6 billion loss is taken up front, it will reduce their earnings and their ability to grow their capital at a time when they are trying to do so. The capital rule currently calls for them to have $240 billion in capital, and they won't be able to keep building their capital if they take a $6 billion hit.
Calabria also explained the steps Fannie and Freddie and the FHFA have taken during the pandemic. Bove congratulates him for his work during the crisis, describing it as "a true public service which will benefit thousands of homeowners."
Bove questions whether potential shareholders will want to raise $240 billion to recapitalize and release Fannie Mae and Freddie Mac from their conservatorships when they will be under total government control after. He thinks they will not and advises investors to stay with the GSEs' preferred shares "and hope that the Supreme Court, at least, believes in the law."
It should be noted that banks remain somewhat under the control of the government in the form of rules and regulations, although Calabria's call for the FHFA to be able to approve the GSEs' future products does go further. It's unclear whether he would even be able to institute such a rule if the Supreme Court backs up the previous court finding which stated that his position as director of the FHFA is unconstitutional.