The FHFA gets another precedent in support of its case as the U.S. District Court for the Northern District of Iowa dismisses an investor lawsuit.
The Housing and Economic Recovery Act doesn't force the FHFA to preserve and conserve the assets of Fannie Mae (OTCQB:FNMA) and Freddie Mac (OTCQB:FMCC), nor return them to private ownership, according to the ruling.
The Senate Banking Committee is only now starting even the most basic work on GSE reform, and the House Financial Services Committee has other priorities like renewing the flood insurance program and rolling back Dodd-Frank.
Focus is shifting to what Treasury Sec. Mnuchin and FHA chief Mel Watt might do about the profit sweep. Might they think about using this extra time to let Fannie Mae (OTCQB:FNMA -3.6%) and Freddie Mac (OTCQB:FMCC -2.4%) begin rebuilding capital? Beyond a $10B dividend payment due March 31, it's unclear.
Fannie Mae (OTCQB:FNMA) in January raised a few eyebrows among community organizer types when it guaranteed a $1B loan to single-family rental giant Invitation Homes (NYSE:INVH). According to Bloomberg, Freddie Mac (OTCQB:FMCC) may also get into the business of insuring mortgages backed by single-family rentals on an institutional scale.
The GSEs had tried to get into this business as early as 2012, but FHFA officials worried their participation would shut down private participation in the market. Instead they continued with their previous operation of backing loans to individual landlords without very many properties to finance.
Appearing on CNBC following this weekend's release of Berkshire Hathaway's annual report, Warren Buffett calls regularly available, government-guaranteed 30-year mortgages "enormously important," but adds that Fannie Mae (OTCQB:FNMA -4.4%) and Freddie Mac (OTCQB:FMCC -4.3%) are not necessarily needed for this.
Where we got into trouble, he says, is the private-public partnership of the GSEs. "Serving two masters [Wall Street and D.C.] is tough," says Buffett.
"We firmly believe that the rights of preferred shareholders in these two enormously profitable, publicly traded companies will be upheld one way or another,” says Fairholme CIO Bruce Berkowitz, one of the major holders of preferred shares in Fannie Mae (OTCQB:FNMA) and Freddie Mac (OTCQB:FMCC).
After yesterday's plunge, shares in FNMA bounced 10% today, and FMCC 11.7%.
While today's appeals court ruling most likely means Fannie Mae (OTCQB:FNMA -29.2%) and Freddie Mac (OTCQB:FMCC -31.3%) shareholders aren't going to get satisfaction in the court system, there's still Treasury Secretary Steven Mnuchin and his desire for changes at the GSEs, says Bank of America's Ralph Axel.
It's unclear what Mnuchin means when he says that, but it's possible he's talking about the net worth sweep.
The timeline for Mnuchin dealing with this is unclear, but Axel suspects sooner rather than later.
It's looking like it could be game over for the common shareholders of Fannie Mae (OTCQB:FNMA -37.9%) and Freddie Mac (OTCQB:FMCC -36.8%) after a federal appeals court affirmed Treasury's net worth sweep.
Bulls will now look to new Treasury Secretary Steven Mnuchin for salvation.
According to Bloomberg's Elliott Stein, a D.C. Circuit court appears to have rejected most Fannie Mae (OTCQB:FNMA) and Freddie Mac (OTCQB:FMCC) shareholder claims, except contract-based arguments regarding liquidation preferences and dividend rights, both of which have been remanded to district court for further hearings.
Higher earlier in the session, FNMA has fallen as much as 8.4% and FMCC 6.5%.
In no surprise given his libertarian leanings, Calabria this week called for Treasury to limit debt issued by Fannie (OTCQB:FNMA +2.2%) and Freddie (OTCQB:FMCC +1.7%) as a way to slow MBS issuance by the two and begin a gradual transition to a private mortgage market.
JPMorgan (NYSE:JPM), Bank of America (NYSE:BAC) and Credit Suisse (NYSE:CS) are among those giving price data to startup Vista Capital Advisors, which - working with Intercontinental Exchange (NYSE:ICE) - plans to create indexes of MBS which could be used as the basis for derivatives.
In the pre-crisis era, derivatives based on the ABX indexes allowed massive bets on and against the U.S. housing market, eventually affording folks like John Paulson and his team even bigger Hamptons mansions, and causing the downfalls of shops like AIG which took the other side.
These new derivatives, however, would be tied to higher quality mortgages then the subprime types favored prior to the property blowup. The new paper will be linked to what's known as "credit-risk transfer" securities issued by Fannie Mae (OTCQB:FNMA) and Freddie Mac (OTCQB:FMCC), which force losses on investors when borrowers default. Since 2013 when the GSEs began selling these, they've offloaded nearly $400B of risk to bond investors, theoretically lowering taxpayer risk.
Vista has some heavy hitters backing it, including Dimensional Fund co-founder David Booth and former Citigroup chairman John Reed. There's also the requisite Nobel Laureate - Robert Merton of Black-Scholes fame.
Testifying at his confirmation hearing moments ago, Steven Mnuchin says he never endorsed the idea of "recap and release" for the GSEs. Both Fannie Mae (OTCQB:FNMA -9.6%) and Freddie Mac (OTCQB:FMCC -9.7%) are of vital importance, he says, and housing reform should include a fix.
KBW's Bose George sees no consensus among Republicans about GSE reform, and thus expects the "stealth privatization" that's already happening (with risk sharing) as more likely than Congress passing legislation or unilateral action from the incoming administration.
Fannie Mae (OTCQB:FNMA -2.7%) and Freddie Mac (OTCQB:FMCC -2%) are lower on today's session, but still more than doubles since the election.