Federal Housing Finance Agency director Mel Watt testified in front of the Senate Banking Committee last week and said his top priority regarding Federal National Mortgage Association FNMA 2.69% and Federal Home Loan Mortgage Corp FMCC 2.61% is to ensure that they’re capitalized enough so they no longer have to draw on the U.S. Treasury’s line of credit.
However, Watt made clear that his efforts are intended solely to limit risk while Fannie Mae and Freddie Mac remain under conservatorship and have nothing to do with returning control back to shareholders.
“It would, therefore, be a serious misconception for members of this Committee, or for anyone else, to consider any actions the FHFA may take as conservator to avoid additional draws of taxpayer support either as interference with the prerogatives of Congress, as an effort to influence the outcome of housing finance reform, or as a step toward recap and release,” Watt said.es
In order to achieve his goal, Watt will likely attempt to modify the Preferred Shares Puchase Agreements to devote some or all of Fannie and Freddie’s income to recapitalization. In addition, Watt said the FHFA has the legal authority to withhold Fannie and Freddie’s dividend payments if he is unable to reach an agreement with the Treasury.
Don’t Get Too Optimistic
While recapitalization of Fannie and Freddie would be a step in the right direction for common shareholders, Height Securities’ Edwin Groshans urges investors not to get too optimistic. Groshan’s points out that Treasury Secretary Steven Mnuchin clarified at his confirmation hearing that previous comments he made about a bipartisan solution for getting Fannie and Freddie out from under government control were “never that there should be a recap and release.”
“The extraordinarily long time it would take the GSEs to achieve a risk-based capital requirement would prohibit the entities from making any dividend payments to shareholders for a decade or longer,” Groshans explains. “This differs materially from taking a trading position to capitalize on a potential change to the dividend payment frequency or the less likely scenario of the GSEs retaining some capital.”
Groshans estimates…
Click here to continue reading
Want to learn more about how to profit off the stock market? Or maybe you just want to be able to look sophisticated in front of your coworkers when they ask you what you are reading on your Kindle, and you’d prefer to tell them “Oh, I’m just reading a book about stock market analysis,” rather than the usual “Oh, I’m just looking at pics of my ex-girlfriend on Facebook.” For these reasons and more, check out my book, Beating Wall Street with Common Sense. I don’t have a degree in finance; I have a degree in neuroscience. You don’t have to predict what stocks will do if you can predict what traders will do and be one step ahead of them. I made a 400% return in the stock market over five years using only basic principles of psychology and common sense. Beating Wall Street with Common Sense is now available on Amazon, and tradingcommonsense.com is always available on your local internet!
