Could Congress get involved in the efforts to free Fannie Mae and Freddie Mac from conservatorship? A letter that was sent by two senators to Treasury Secretary Steven Mnuchin and Federal Housing Finance Agency Director Mark Calabria suggests it might.
However, there are reasons to believe Congress won't step in to prevent Fannie Mae and Freddie Mac from exiting conservatorship.
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Letter suggests Congress could block Fannie Mae, Freddie Mac from exiting
Senators Mark Warner and Michael Rounds sent a letter to Mnuchin and Calabria on Monday. The letter is about the status of the government-sponsored enterprises. It reminds them that the U.S. government has laid out a lot of money to assist Fannie and Freddie and is ready to invest more if needed.
The latter also argues that the government must be repaid for its extensions of credit at fair market value, but it ignores all the payments the GSEs have made thus far. The senators who sent the letter want to see the government get even more money from Fannie and Freddie even though it has been claiming the dividends rightly owned to preferred shareholders for years.
In a note, analyst Dick Bove of Odeon Capital said the senators are rejecting the idea that the net worth sweep can be eliminated and that the senior preferred shares can be considered paid. They also acknowledge that Mnuchin and Calabria can decide whatever they choose, but they also suggest that Congress might want a say over what happens to Fannie Mae and Freddie Mac.
Why send the letter now?
Bove notes some interesting things about the timing of the letter. The efforts to free Fannie and Freddie from conservatorship have been advancing for quite some time, but they are only just now expressing a concern. Bove believes they might be raising the issue now because an action to release the GSEs from their conservatorships is imminent.
He also points out that only two senators signed the letter. He suggests that this could mean that there is little to no interest for Congress to get involved in what happens to Fannie Mae and Freddie Mac. In fact, Congress might even be relieved to have that issue removed from its plate.
Finally, he questions why the letter focuses on the government being repaid for the senior preferred shares when it has already been repaid. He suggests that the two senators could be raising the issue because there is a growing sentiment that the preferreds have already been repaid, and the senators are objecting to the idea.
Congress might not get involved in Fannie Mae and Freddie Mac
The letter appears to be very negative because it suggests that Congress could step in and get involved in the future of Fannie Mae and Freddie Mac, interfering with negotiations. However, Bove believes the opposite might actually be true.
He said there could be negotiations going on that are moving in the direction that shareholders like, and the two senators may be trying to stop the forward momentum. The Supreme Court is set to hear the Collins case, which involves the net worth sweep, in December. Tim Pagliara of CapWealth Advisors has said the case is turning out to be very "embarrassing" for the government because it is losing and "committed perjury" when it brought Fannie and Freddie into their conservatorships. Because of the government's weak position in the case, there is a possibility that there are negotiations going on that aren't being made public.
Bove views the senators' letter positively because it provides further evidence that shareholders may finally be winning their case against the government.