Fannie-Freddie Overhaul Plan in Senate Falls Flat on Wall Street

Felice Maranz
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Fannie-Freddie Overhaul Plan in Senate Falls Flat on Wall Street

(Bloomberg) -- A plan released by Senate Banking Committee Chairman Mike Crapo on Friday for housing-finance legislation ending U.S. control of Fannie Mae and Freddie Mac probably won’t make much of a difference, some analysts say. They’re flagging the difficulty of moving legislation in Congress and the likelihood the Trump administration will take action.

Fannie shares fell as much as 5.7 percent in Monday trading and Freddie fell as much as 5.5 percent. Fannie has rallied 141 percent so far this year, while Freddie has gained 131 percent amid speculation change is coming for the two companies.

Here’s a sample of what some are saying:

KBW, Bose George

Crapo’s “outline is fairly similar to the framework proposed earlier in the Johnson-Crapo bill,” George wrote in a note. KBW views the timing “as a way for Senator Crapo to stay out ahead of others,” while not changing KBW’s view that “in 2019 most policy changes will come from the administration, as Congress is unlikely to pass legislation.”

KBW believes the Trump team may propose a plan to recapitalize Fannie and Freddie, and may legally be able to do so without involving Congress; at the same time, “the logistics of recapitalization are likely to be very challenging.” George cites the companies still owing the government $191 billion, and still needing a significant amount of capital -- which would be difficult to raise, particularly amid uncertainty about how Congress might alter the companies’ structure.

Reiterates KBW’s underperform rating and $1 price targets on both Fannie and Freddie shares, and remains cautious on the preferred shares. “While there are more scenarios in which the preferred shares could have upside, that would still depend on the GSEs being successfully recapitalized.”

Compass Point, Isaac Boltansky

“Crapo’s outline thoughtfully builds on the panoply of previous proposals, but we continue to believe that there is no viable path for legislative mortgage finance reform in this Congress,” Boltansky wrote in a note.

There’s “a cosmic chasm between a three-page outline and actionable legislation restructuring roughly 15% of the economy,” he said, adding that he finds the legislative discussion “noteworthy primarily within the context of forthcoming administrative reform efforts.”

Height Capital Markets, Ed Groshans

Crapo’s outline is in line with the Treasury Department, Groshans wrote in a note, adding that Height is keeping its odds at 85 percent that Treasury Secretary Steven Mnuchin and Federal Housing Finance Agency Acting Director Joseph Otting will initiate administrative actions to end the conservatorship of Fannie and Freddie.

Groshans also noted that the proposal sets limits on the mortgages that can be included in an insured mortgage backed security, and sets down payment requirements, which Height expects will be 3 percent to 5 percent, and doesn’t permit guarantors to insure mortgages with loan-to-values greater than 80 percent. That’s positive for mortgage insurance companies, including MGIC Investment Corp., Radian Group Inc., Essent Group Ltd., NMI Holdings Inc. and Genworth Financial Inc., he said.

Groshans expects Treasury’s plan for the GSEs will be released this month, and that Treasury and FHFA will reach agreement to permit Fannie and Freddie to retain additional capital. This agreement could occur when Fannie and Freddie report fourth-quarter earnings or in conjunction with Treasury’s plan. He sees Mark Calabria being confirmed by the Senate in April, and expects Calabria, as FHFA Director, will amend the Preferred Share Purchase Agreements (PSPAs) and end the Net Worth Sweep (NWS), before the end of June.

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