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Fannie (FNMA) and Freddie Tick Higher as New GSE Letter Suggests Return of Capital Retention Conversation - Compass Point

February 5, 2016 10:09 AM EST
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Shares of Fannie Mae (OTC: FNMA) and Freddie Mac (OTCC: FMCC) are up by about 3% following a new GSE letter which suggests the return of the capital retention conversation, according to Compass Point's Isaac Boltansky.

Boltansky noted that on February 4 Representatives Stephen Lee Fincher (R-TN) and Mick Mulvaney (R-SC) sent a letter to Treasury Secretary Lew and FHFA Director Watt expressing their concerns about the capital position of Fannie Mae (FNMA-NC) and Freddie Mac (FMCC-NC). As a reminder, the Third Preferred Stock Purchase Agreement (PSPA) required the GSEs to send every dollar above their capital buffers to the U.S. Treasury (UST) in the form of a dividend and mandates that those capital buffers are reduced to $0 by 2018.

Representatives Fincher and Mulvaney wrote: “In a post-Dodd-Frank world, Fannie and Freddie will be the only significant financial institutions not voluntarily or mandatorily raising their capital standards; instead, they are being told to lower their capital -- to zero. This does not make sense.” The letter requests a response on or before March 1, 2016.

The firm's view:

"The passage of the Jumpstart GSE Reform provision prevents the UST from disposing of its senior preferred position in the GSEs which forecloses on the recapitalize and release option until at least 2018 but it does not prevent a conversation regarding the merits of GSE capital retention. While GSE capital concerns have been dismissed by Obama Administration officials given the ~$258 billion in UST lines backing the firms, our sense is that calls for GSE capital retention from both the left and right are likely to reemerge in the months ahead. We expect a GSE capital retention bill to be released in 1H16 and while it will not become law it should serve as a notable mile marker in the GSE conversation. Our view remains that neither legislation nor administrative action recapping and releasing the GSEs are possible in 2016, but political concerns regarding the PSPA structure could lead to a consideration of changes to the bailout agreement allowing for capital retention as a means of staving off another GSE draw."



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