Fannie Mae, Freddie Mac Reform Bill Not Likely To Pass This Year

Compass Point Research released a report on March 17th examining the chances for Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) reform bill to become law this year. Analyst Isaac Botansky’s conclusion was, despite the likelihood of the bipartisan Johnson-Crapo bill advancing from the Senate banking committee to the floor, that there is only a 5% chance that the bill will clear both houses of Congress and become law this year.

The overview of the report offers a summary of Boltansky’s point of view. “The Senate Banking Committee leadership released Fannie Mae and Freddie Mac reform language on March 16. The discussion draft echoes the Corker-Warner proposal that was released in the summer of 2013 but is far more detailed. We continue to believe that there is not a path to passage for Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) reform in this Congress but note that the committee-level work ahead will undoubtedly influence the mortgage finance conversation in D.C. and therefore warrants attention.”

Breakdown of the Johnson-Crapo bill

The Johnson-Crapo bill has three main elements — (1) the resolution of the Fannie Mae and Freddie Mac; (2) the establishment of a Federal Mortgage Insurance Corporation (FMIC) which would guarantee loans and create a catastrophic insurance fund; and (3) a requirement that private capital take 10% losses before the guarantee kicks in.

Fannie Mae, Freddie Mac reform bill not “shareholder friendly”

Boltansky points out that the current proposal offers Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) junior shareholders no more hope of recovering significant value than than the bill considered last year did. “The Johnson-Crapo draft, similar to the Corker-Warner bill, requires actions that will maximize the return on the government’s senior preferred stakes in Fannie Mae and Freddie Mac which limits the path to recoveries for junior securities.”

Johnson-Crapo bill has good chance of approval by Senate banking committee

The report argues that given the bill has 12 sponsors on the 22-person Senate banking committee, there is a reasonably good chance the bill will advance out of committee. Passage is not, however, a foregone conclusion, and the size of the majority in the vote is an important consideration for the future of the bill on the Senate floor.

Boltansky concludes the report by outlining his reasons to belief the bill will not move on to become law this year. “We continue to believe that Senate leadership is unlikely to push Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) reform in this session even if legislation clears the Senate Banking Committee. Senate Democrats appear content with Fannie Mae and Freddie Mac in the near-term given the confirmation of Mel Watt as FHFA Director, the continued profits generated by the Fannie Mae and Freddie Mac, the steady recovery in the housing market, and the political pitfalls of tackling housing issues in an election year. Furthermore, we continue to believe that Congressman Hensarling (R-TX) is unlikely to alter the House GSE reform proposal known as the PATH Act. House GOP leadership, much like their Senate counterparts, is likely to avoid the issue of housing reform as well given its aversion to making the rank-and-file take tough votes in an election year. We continue to believe that Fannie Mae and Freddie Mac reform will not become law in this Congress and instead view 2015 or 2017 as far likelier dates for legislation to head to the President’s desk.”