Federal Home Loan Mortgage Corp (OTC: FMCC)
and Federal National Mortgage Association (OTC: FNMA) shares have caught fire Thursday, jumping more than 11 percent each after
a new letter to Treasury Secretary
Steven Mnuchin and Federal Housing Finance Agency director Mel Watt demonstrated that Congress hasn’t forgotten about Fannie Mae
and Freddie Mac.
The letter, signed by senators Sherrod Brown (D-OH), Catherine Cortez Mastro (D-NV), Jack Reed (D-RI), Robert Menendez (D-NJ),
Chris Van Hollen (D-MD) and Brain Schatz (D-HI), urges Mnuchin and Watt to address the fact that Fannie and Freddie aren’t
retaining any capital on their balance sheets, potentially leaving them in need of another bailout during the next economic
downturn.
Related Link: Fannie
& Freddie Both Changed The Way They Talk About Their Dividends, And It's Not By Accident
“Specifically, we are concerned about the Department of Treasury and the Federal Housing Finance Agency’s (FHFA) requirement in
the Preferred Stock Purchase Agreements (PSPAs) that the GSEs send all their income to the Treasury Department leaving two entities
that back more than $5 trillion in mortgage debt with zero retained capital reserves beginning on January 1, 2018,” the letter
reads.
Bailouts Part II
The senators are concerned that as soon as either of the GSEs start losing money, they will be forced to immediately draw from
Treasury funds. By building up a sizable capital base, Fannie and Freddie could protect themselves from the next downturn.
While building up capital could potentially be a good first step in the right direction for Fannie and Freddie investors, the
senators were clear that they aren’t calling for the GSEs to be released from
government control.
“We are simply requesting that the GSEs be permitted to build capital. We do not believe they should be released from
conservatorship absent reform.”
Democrats aren't the only ones calling for recapitalization, The Republican National Committee
has said no American financial institution can operate safely without adequate capital and "taxpayers will not
be sufficiently protected until Fannie Mae and Freddie Mac are permitted to rebuild equity capital."
A Long Road Ahead
Even if the government opts to begin recapitalizing the two GSEs, investors should keep their expectations in check. Earlier
this year, Height Securities analyst Edwin Groshans estimates it would take roughly a decade for Fannie and Freddie to be
adequately capitalized if they were allowed to retain 100 percent of their earnings.
The senators requested a response to the requests made in the letter by Sept. 29.
Related Link: Despite
Courtroom Losing Streak, Legal Action Still Best Route For Fannie Mae, Freddie Mac Shareholders
_______ Image Credit: By The White House from Washington, DC (Regional Media Day: 7/25/17) [Public domain], via Wikimedia Commons
© 2017 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.