Why FNMA Stock & FMCC Stock Owners Should Now Expect GSE Reform

- January 19, 2017

fnma-stock-fmcc-stockThe fact that so many senators and politicians alike disapprove of Steven Mnuchin as the Treasury Secretary is a great sign that real GSE reform is coming. That was never more evident than when Mnuchin spoke at his confirmation hearing on Thursday, with Senators leaving the hearing and joking of valium to “deal with the questions”.

Federal National Mortgage Association (OTCMKTS:FNMA)  and Federal Home Loan Mortgage Corporation (OTCMKTS:FMCC), or Fannie Mae and Freddie Mac, have the most to gain if Mnuchin becomes Treasury Secretary. He has publicly stated on many occasions that GSE reform, or freeing Fannie Mae and Freddie Mac from government conservatorship, is a top priority. If so, the future could not be brighter for FNMA stock and FMCC stock owners.

Before he can do that, Mnuchin had to answer tough questions about his past, questions raised by the very people who don’t want him in the role. The reason is that many policy makers don’t want Fannie Mae and Freddie Mac out of government conservatorship. They like Fannie and Freddie right where they are as GSEs, with FNMA stock and FMCC stock essentially speculative biotech bets on reform.

Fact is that Fannie Mae and Freddie Mac are cash cows for the Treasury, paying it more than $255 billion since being bailed out for $187 billion during the financial crisis. There’s no question that Fannie Mae and Freddie Mac have been a profitable investment for the government, but the government has left the entities under-capitalized, and has made it impossible to free themselves from conservatorship without real GSE reform.

Mnuchin is unique in that he has seen first hand what government conservatorship has done to the mortgage market, and to banks. He co-owned the former IndyMac, OneWest Bank, and inherited risky mortgage portfolios with the task of cleaning up the mess with loan modifications in recent years. With GSEs in place, Mnuchin realized its a hard job, with many people still losing their homes.

Therefore, he wants to free Fannie Mae and Freddie Mac from government conservatorship, and because of how profitable Fannie & Freddie have been to the Treasury, it’s no surprise that Thursday’s confirmation hearing turned into a circus when Mnuchin had the opportunity to address rumors.

FNMA stock & FMCC stock owners have reason for optimism

With that said, and as a FNMA stock owner, I am more optimistic than ever after hearing Mnuchin speak, and seeing how the Senate finance committee responded to his statement. I believe that he will indeed force real change and GSE reform.

As previously discussed, the big question is how? I still believe that investors will end up paying for it. The government is not going to give back money or let Fannie Mae and Freddie Mac keep more of their earnings while in conservatorship. Therefore, the market, you and I, will end up paying for it. My best guess is an offering of sorts, like an IPO, or some way to structure a recapitalization where Fannie & Freddie quickly become cash rich, and stay that way.

My belief is that FNMA stock and FMCC stock owners will support this approach. After all, without government conservatorship, and real GSE reform, FNMA stock and FMCC stock could very well be worth upwards of $20, even $30/share. At $4/share, both Fannie Mae stock and Freddie Mac stock are very much like speculative biotechs, but once Mnuchin has his formal role, all bets are off for the greedy senators who want to keep their cash cow alive.

In other words, if you don’t own a little bit of FNMA stock and FMCC stock, now is a good time.

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One Comment

  1. avicere
    Posted February 18, 2017 at 7:11 pm | Permalink

    There are over 30 classes of junior preferred that have a face value of either $25, $50 or $100,000 each that trade between 30 & 40% of face value that are likely safer bets than the FNMA common and under a recap scenario will hit FV quickly esp if they start paying dividends in 2018 (some are in the 7-8% range that might trade at a premium if not called)

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