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Dick Bove Calls Fannie-Freddie Regulatory Shift ‘Bad’ for Shares

Dick Bove Calls Fannie-Freddie Regulatory Shift ‘Bad’ for Shares

(Bloomberg) -- The change in stance by Fannie Mae and Freddie Mac’s regulator over whether the mortgage giants should be released from their conservatorships is “very bad” for common shares of the companies, Odeon Capital Group analyst Dick Bove wrote in a note.

The Federal Housing Finance Agency is “no longer willing to argue that it will act alone to recap and release” the government-sponsored enterprises from their conservatorships, Bove said, citing recent remarks by FHFA Director Mark Calabria. “It may take three to four years to do this,” Bove said, which bodes poorly for common shares.

Dick Bove Calls Fannie-Freddie Regulatory Shift ‘Bad’ for Shares

“Recap and release” refers to the process of bolstering Fannie and Freddie’s ability to absorb losses and then returning them to private ownership. Calabria said that under his timeline, the companies could exit U.S. control by 2022 or 2023.

Bove said that Calabria’s latest position was “totally different from the one he adopted last May,” when he warned that he wouldn’t wait for Congress to take action, and that he was “going to drive for the recap and release of the GSEs as soon as possible.” Now, Calabria has “repudiated” those views, Bove wrote, adding that it’s “hard to assume that the FHFA will be the champion that brings these companies back to the market.”

Separately, Compass Point managing director for policy research Isaac Boltansky said in a note that there’s “growing apprehension given where we are in the presidential and economic cycles.” Boltansky wrote that Calabria’s recent remarks “reaffirmed that any GSE footprint reductions would be modest and tactical,” which makes the timeline more uncertain “given the combination of political, practical and economic factors.”

Calabria has now clipped Fannie and Freddie’s “wings,” Height Capital Markets analyst Edwin Groshans wrote, adding that the regulator’s remarks “were not supportive of an early release from conservatorship for Fannie Mae and Freddie Mac.”

Groshans doesn’t forecast that Fannie or Freddie will meet statutory capital requirements before the 2020 election, and said that if the Treasury’s position isn’t addressed before the election and a new administration takes over, a 10% dividend would be reinstated. That dividend “would be equal to or greater than the GSEs’ earnings, effectively preventing them from accreting capital and exiting conservatorship,” he said.

Odeon’s Bove also said to “look for positive information” regarding preferred shares early next week. The Court of Federal Claims in Washington will hear oral arguments November 19 on the government’s motion to dismiss lawsuits by junior preferred and common shareholders challenging the so-called “net worth sweep” of profits.

Read more: Sept. 13, Fannie-Freddie Appeals Ruling May Help Investors in Claims Court: BI

Bove said that his position has “always been that the common stock has little to no value and the preferred issues could be very attractive,” as investors should “trust the courts rather than the government bureaucracy.”

Fannie common shares fell as much as 3% in Thursday trading while Freddie’s dropped as much as 2.8%.

To contact the reporter on this story: Felice Maranz in New York at fmaranz@bloomberg.net

To contact the editors responsible for this story: Catherine Larkin at clarkin4@bloomberg.net, Scott Schnipper

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