Fannie Mae privatization: One analyst thinks this needs to happen

In recent weeks, former Freddie Mac CEO Don Layton wrote two monographs about Fannie Mae and Freddie Mac privatization and GSE reform. Analyst Dick Bove of Odeon Capital read those monographs and set out what he thinks must happen to provide the best possible results for investors.

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First steps toward Fannie Mae, Freddie Mac privatization

According to Bove, one of the first things that must be done is to have the senior preferred shares be declared fully paid in both principle and interest. If this doesn't happen, he says there is no next step. Additionally, the junior preferred shares should pay an initial dividend and then called and replaced with a new issue of preferreds.

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Bove also thinks the government should exercise its warrants and argues that Federal Housing Finance Agency Director Mark Calabria must be removed from his position. Bove believes Calabria wants to eliminate Fannie Mae and Freddie Mac and argues that he has taken some steps to do this. However, Tim Pagliara of CapWealth Advisors doesn't believe Calabria wants to eliminate the government-sponsored enterprises. He has told ValueWalk this in past interviews.

If you believe Bove instead of Pagliara, then supposedly, Calabria won't allow the GSEs to raise the money needed to function in the private sector. Bove also believes the capital rule as proposed should not be allowed to stand. He argues that it is one of the ways Calabria is using to "cripple" Fannie and Freddie. Pagliara expects the rule to be changed before it is finalized.

Consent decree for Fannie Mae, Freddie Mac privatization

Next, Bove said Fannie and Freddie must be released from their conservatorships immediately with a consent decree that will allow them to function. He said this will "avoid unnecessary political wrangling" and allow them to "build a future that will help both housing and the economy." Pagliara also expects a consent decree sooner rather than later.

Bove believes experts from the FHFA, Fannie Mae and Freddie Mac, and advisors to them should work together on a new business model that recognizes the critical role they play in housing finance. He also said the business model should offer "a plausible growth path for their futures that includes the use of private capital."

Further, Bove said Fannie and Freddie should be given 10 years to build retained earnings.

How these steps will help investors

Bove believes these steps would "assuage" junior preferred shareholders while providing a "realistic opportunity" for common shareholders to make money. He also said theses steps should help the housing industry and stimulate the economy.