By the time 2017 comes to an end, Federal National Mortgage Association (OTCMKTS:FNMA) and Federal Home Loan Mortgage Corporation (OTCMKTS:FMCC), better known as Fannie Mae and Freddie Mac, will be closing in on $300 billion in total payments to the Treasury. Not bad for a $187.5 billion investment that the government paid Fannie Mae and Freddie Mac as part of their bailout, especially given there is no end in sight to these “dividends” that keep Fannie & Freddie undercapitalized and FNMA stock at just a fraction of its actual worth.
Any FNMA stock or FMCC stock owner knows that the bailout agreement has become highway robbery. I often compare it to Negan requiring “all”, not “half” of the housing giants’ earnings.
Over the last six months, with the total repayments far exceeding that of the Treasury’s bailout, the voices in favor of GSE reform have grown much louder. These include small lenders, large home builders, large investors like Paulson & Co and Pershing Square, and retail investors in FNMA stock and FMCC stock. Even Freddie Mac began its first quarter news release by stating that “the company is scheduled to return $2.2 billion to taxpayers (Treasury) in June 2017 for a total of $108.2 billion in dividends paid to the Treasury.” That may seem like a vanilla statement, but the mention of that total is a strong reminder to disgruntled FMCC stock owners.
Fannie Mae pays even more. Fannie Mae said it expects to make a $2.8 billion payment to the Treasury in June.
GSE reform would essentially end the dividend payments and net worth sweeps, thereby allowing Fannie Mae and Freddie Mac to retain earnings in an attempt to capitalize their businesses.
With that said, GSE reform would seem like a no-brainer, but fact is Fannie Mae and Freddie Mac agreed to this bullshit during the financial crisis. Therefore, FNMA stock and FMCC stock owners have fought in court, losing, most recently the Perry ruling, because Fannie Mae and Freddie Mac really don’t have a viable argument, regardless if the Treasury’s practice is unethical and wrong. That’s why newly appointed Treasury Secretary seemed like a White Knight for Fannie Mae stock and Freddie Mac stock owners.
Steven Mnuchin plays both sides, at best
Steven Mnuchin co-owned the former IndyMac and operated at Goldman Sachs in difficult housing conditions due to the dysfunctional government owned and operated Fannie Mae & Freddie Mac. He has said several times that GSE reform is a top priority for the Trump Administration, and himself.
Yet, here we are, a few months into his tenure, and when given the perfect opportunity to make a bold statement, Mnuchin punts the ball.
In response to a question from Bloomberg News regarding whether (Fannie Mae & Freddie Mac) should continue to follow the bailout terms by paying dividends to the government, a Treasury spokeswoman stated that Steven Mnuchin wants the mortgage-finance giants to keep sending their payments as part of the bailout agreement.
My problem with this response is that it is a political answer, and that there was no elaboration. Typically, when a person in such power has strong convictions about policies, they use opportunities such as this to express their issues with more clarity and more importantly propose their solutions.
Mnuchin’s spokesperson did no such thing, and did so at a time when more pressure than ever is put on Mel Watt, director of the Federal Housing Finance Agency, to direct the mortgage-finance giants to halt payments. If you recall, Watt was reportedly considering a suspension to the dividend back in March.
Had Mnuchin taken a stand, then it could have pressured the Treasury to work with GSEs or perhaps give Watt the support needed to go through with the suspension of dividend payments. Things so simple mean so much in scenarios like this.
The fact that Mnuchin appears to be taking a less aggressive approach is very concerning to me as an FNMA stock owner. I have said many times that a solution in the courts will not be found, that Steven Mnuchin is our best hope.
When Steven Mnuchin’s role as the new Treasury Secretary became apparent, FNMA stock soared from $1.75 to a peak of $5/share late last year.
With GSE reform, even a private market solution, Fannie Mae and Freddie Mac could recapitalize and retain future profits. In the sake of FNMA stock, it would mean upside of 500%, maybe 1,000%.
However, Mnuchin is in fact the Treasury Secretary nowadays. He is no longer finding solutions for troubled mortgages at Goldman Sachs, or running IndyMac. With his new roles and fiduciary duties, perhaps Mnuchin sees just how important Fannie Mae & Freddie Mac are to the Treasury’s balance sheet. Maybe he has had a change of heart. Maybe his idea of “GSE reform” no longer includes a private market solution.
These are all things that FNMA stock owners need to consider, because if Steven Mnuchin isn’t on our side, there’s not a lot of hope.