Wall Street Hails Fannie-Freddie Court Win, Mnuchin Plan
Fannie-Freddie Soar as Wall Street Hails Court Win, Mnuchin Plan
(Bloomberg) -- Fannie Mae and Freddie Freddie Mac surged to their highest levels since February 2017 as analysts weighed in with an optimistic assessment after a double blast of good news rekindled this year’s rebound.
Fannie and Freddie shares both rallied as much as 35%, reaching session highs in afternoon trading, after Treasury Secretary Steven Mnuchin said he expects a deal on the government-sponsored enterprises retaining earnings soon and as Compass Point upgraded them after shareholders won in court. With Monday’s gains, both stocks have more than doubled this year.
A sense of “urgency” is taking hold in Washington after federal appeals court judges overturned a ruling that backed the government’s right to take all of the companies’ profits and concluded that structure of the Federal Housing Finance Agency, or FHFA, which regulates the two mortgage giants, is unconstitutional, Compass Point analyst Isaac Boltansky said by email. That urgency was evident during Mnuchin’s interview with Fox Business where he stated that “now is the time to recapitalize” the GSEs, Boltansky said.
Investors and analysts will keep a close eye on testimony from Mnuchin and FHFA director Mark Calabria on housing finance reform at a Sept. 10 Senate Banking Committee hearing.
Here’s a sample of some of the latest commentary:
Compass Point, Isaac Boltansky
“If the ruling stands, then the election next November stands as a de facto deadline for administrative action and nothing catalyzes action in Washington quite like a deadline,” Boltansky said. “As we see it, the near-term road map is becoming clearer with a letter agreement allowing some degree of capital retention as early as this month, a PSPA amendment in the fourth quarter or first quarter of 2020, and additional administrative steps in 2020.” PSPA refers to “senior preferred stock purchase agreements.”
Earlier, Compass Point raised Fannie and Freddie common shares to buy from neutral after the Fifth Circuit decision delivered shareholders a “significant victory that will almost certainly influence the forthcoming administrative reform effort,” analyst Chris Gamaitoni wrote in a note.
Bloomberg Intelligence, Elliott Stein
“Though Mnuchin wouldn’t comment on the court case, we think the Sept. 6 court ruling in the 5th Circuit undercuts the legality of the sweep of Fannie Mae and Freddie Mac profits to Treasury, while boosting GSE shareholders’ leverage in anticipated negotiations to end it and eliminate some or all of Treasury’s senior preferred liquidation preference. The decision also makes it easier for a president to fire the FHFA and CFPB director without cause.”
KBW, Brian Gardner
The court decision was only a “partial victory for GSE shareholders,” Gardner cautioned in a note. “Despite being one of the shareholders’ few wins in court, we urge investors not to overreact to the headlines.”
That’s because “the decision was a mixed bag and increases the chances that the litigation reaches the U.S. Supreme Court since there apparently will be a split among different federal appellate courts -- something the Supreme Court will want to resolve.”
“The case is still far from settled and we think the government could still prevail on the merits,” he said.
Cowen, Jaret Seiberg
“Tuesday’s Senate Banking hearing is the critical next step in the push for Fannie and Freddie to exit conservatorship,” Seiberg wrote. “We will watch the reaction of Democrats, especially if Elizabeth Warren attends.”
“That becomes even more important as the Fifth Circuit decision on Friday gives a new president the right to replace the FHFA director. So a Democratic win in 2020 could impact recap and release.”
“Recap and release” refers to the process of bolstering Fannie and Freddie’s ability to absorb losses and then returning them to private shareholder ownership.
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, Richard Richtmyer
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