So Fannie Mae (OTCQB:FNMA) has a new chairman appointed by the new head of the FHFA Mel Watt. Reading Mr. Perry’s quotes upon accepting the position he does not sound like a person content to just sit back and watch $FNMA disappear. To the contrary he seems to be saying it is far too important to touch. This has to make one look at Mel Watt’s appointment (I’ll assume Watt knows how Perry feels about the entity’s role) and wonder if it signals a shift in thinking at FHFA on the GSEs. It certainly is not anywhere near to former FHFA head Ed DeMarco’s verbiage on the GSEs.
Quotes from Perry:
“Fannie Mae plays an essential role in helping millions of Americans gain access to affordable homeownership and rental housing,” Perry said in a statement. “I am honored to leverage my experience to partner with director Watt, my fellow board members and the Fannie Mae management team to support this very important organization and its work. Fannie Mae has made significant progress over the last five years, and I look forward to playing an expanded role in its next chapter.” -
“It is an honor to lead the board’s governance of Fannie Mae and I look forward to continuing to work with my fellow board members, our management team, Director Watt and his team at FHFA to deliver on the company’s essential role in the housing market,” said Perry.
Think about it. Low income and affordable housing advocates universally supported Watt’s nomination to FHFA given his history of support for them. If you were Watt and looked at the GSEs, what is the best way to assure lending/assistance to those groups was not interrupted? Would it be to wind down the GSEs or reduce their role in favor of a private solution? Or, would it be to work within the existing structure and make small changes to support his goals. I think the answer is obvious.
So we bought the preferred stock just over $5 last September on the thesis we’d make 5X on our money (par is $25) if the common was worth even $.01 when this is all over. I also at the time thought the cases laid out by various plaintiffs (vs. Treasury and FHFA) were very strong. The common now is increasingly looking as though there is going to be significant value in it down the road (Ackman thinks so) for the same reasons, the court proceedings. The responses from the government to the lawsuits have been weak at best and now that the government has been repaid for their support, the best alternative for the government is so eliminate the net worth sweep and move on. My guess is action in this comes when they lose their motion to dismiss the lawsuits later this spring or, if plaintiffs win their pending motion for discovery. Discovery in these cases on would be immensely interesting at a minimum. I have maintained from the first day of this investment and still do that Treasury and the FHFA’s entire defense, that FHFA was acting alone as a regulator and not in concert with Treasury or Congress evaporates if discovery is granted.
Just consider this memo from Treasury in 2010 obtained without discovery. It by itself has brought up the specter that securities fraud was committed as this very material information was not disclosed in any public GSE filing. It was also written over a year prior to the Net Worth Sweep being enacted which can only make one wonder how Treasury did NOT have a hand in dictating the Sweep as they claim? Just imagine what will be unearthed when/if plaintiffs are allowed to dig?
Aside from all that it certainly does not seem Watt or Perry seem eager to embrace any plans currently is Congress that deal with the GSEs. That could make for an interesting showdown, especially considering Obama appointed Watt and Watt appointed Perry. Now, we also have elections this fall. So, nothing will be done on the GSEs in the fall pre-election and we know Congress does nothing from June-Sept. So that means unless Congress gets it act together (likely?) before June and both houses agree on a new format for the GSEs, we can be assured nothing happens until after the elections in November. Even then anything happening is VERY dependent on the outcome of those elections. So, is it likely Congress pulls something together in the next three or four months???? I don’t think so either … especially since they have been working on this for the past 5 years with no real progress.
All this ignores the painfully obvious fact ... there is no private entity or group that can replace the functions of the GSEs, especially in times of crisis when they would be needed most. Just look at bank lending during times of crisis, it evaporates. A private entity insuring every loan in a housing downturn would do the same thing ... stop writing new biz. That would lead to a further collapse in home lending which would only exacerbate the crisis. If you are gonna have a 30-yr loan (which is unique to the US) , you need a lender/insurer that can step into the abyss when it is needed most ... like it or not, that can only be the government.
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