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Fueling Up The Frannie Rocket Launch

Glen Bradford profile picture
Glen Bradford


  • FHFA sounds like they are going to increase Fannie Mae and Freddie Mac guarantee fees, again.
  • After years of disappointment in every branch of government, the final form of Fannie and Freddie as taken shape and the path out of conservatorship is simple but takes time.
  • The purpose of conservatorship will largely be shifting how they are run from one of business economics to one of the economics of national security.
  • People who own homes who have Fannie and Freddie mortgages will effectively have to pay larger guarantee fees to support keeping a mountain of money sitting idle on Fannie and Freddie balance sheets.
  • The theory is that although they pay more in guarantee fees, perhaps this mountain of capital helps lower mortgage rates.

Fannie Mae (OTCQB:FNMA) and Freddie Mac (OTCQB:FMCC) are being set up to be the two most predictably profitable utilities in America. If there is anything institutional investors love it is predictable profitability. The problem with them right now is their capital structure. In the world of possible analogies, the one that best explains what is happening here is like a rocket getting ready to launch into orbit. The purpose of this article is to try to explain why I think it will pay to buy at these prices and wait for basically a bunch of incremental small things to happen for the next 6 months while they "fuel up the rocket for lift off" which I believe is scheduled to begin the countdown immediately after November elections. For me lift off is defined as the fourth amendment.

Investment Thesis: If 100% in 12 months sounds good to you, you might be interested in buying equity in Fannie Mae and Freddie Mac. Last year the companies were put on a path out of conservatorship that Trump's Treasury put together. Team Trump has always had housing finance reform as a priority on their agenda but they haven't been able to do much. After years of prior administration policy ruling the day because Obama holdover Melvin Watt was impeding progress, he was replaced as director of FHFA by Mark Calabria. Mark Calabria helped write the law that governs FHFA and in 2015 he wrote a paper saying that the conservatorships violate HERA and established insolvency principles. In other words, Team Trump has brought in the guy who wrote the law to ensure that FHFA follows the law, a novel concept for FHFA because up until Calabria was put in charge, FHFA simply did Treasury's bidding and as such Treasury has senior preferred and warrants. Treasury's senior

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Glen Bradford profile picture
Glen Bradford MBA contributes to Seeking Alpha primarily to read people's negative feedback so that he can avoid generating unnecessary losses. "Uncertainty will certainly work for me." - Glen Bradford March 2009.Glen wishes you a bright sunny warm day filled with smiles, laughter, and love.The Supreme Court got it wrong, which is sad, but it's not over yet.

Analyst’s Disclosure: I am/we are long FMCCG, FMCCH, FMCCI, FMCCL, FMCCM, FMCCN, FMCCP, FMCCS, FMCCT, FMCKP, FNMFN, FNMFO. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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