Calabria helped draft the the Housing and Economic Recovery Act, which placed Fannie Mae, Freddie Mac into conservatorship
Shares of Fannie Mae (FNMA) and Freddie Mac (FMCC) are in focus in morning trading after the Senate confirmed Mark Calabria as the head of the Federal Housing Finance Agency, the regulator of the mortgage guarantors. Separately, an analyst initiated Fannie Mae with a Neutral rating, saying he sees potential value in the preferred shares.
CALABRIA CONFIRMED: On Thursday, the Senate confirmed Mark Calabria as director of the Federal Housing Finance Agency, the regulator of mortgage guarantors Fannie Mae and Freddie Mac. Calabria, who most recently served as chief economist to Vice President Mike Pence and, before that served at the libertarian think tank the Cato Institute, was confirmed by a 52-44 vote. He will serve a five-year term as the chief regulator of the government-sponsored enterprises, or GSEs.
Calabria helped draft the the Housing and Economic Recovery Act, which was passed in July 2008. HERA, which placed the two mortgage giants into government conservatorship, a status that was intended to be temporary, created the FHFA. According to reports, the ending of the conservatorship of Fannie Mae and Freddie Mac will be debated as a key issue under the leadership of Calabria.
WHAT’S NOTABLE: Calabria has previously been an “outspoken critic” of Fannie Mae and Freddie Mac and has called for the end of the conservatorship of the mortgage guarantors. He came under heavy scrutiny from Democrats at his February nomination hearing for previous positions he had taken on the GSEs. They questioned his views on affordable housing, the 30-year fixed-rate mortgage and capital requirements for Fannie and Freddie. At the time, Calabria promised at the hearing to preserve the GSEs’ affordable housing goals and the 30-year mortgage.
Acting FHFA Director Joseph Otting told agency staff in January that the White House and the Treasury Department would release an imminent plan to end the conservatorships of the GSEs, setting off speculation that the administration might try to skirt Congress in overhauling the housing finance system, American Banker reported.
“I congratulate Mark Calabria on his confirmation by the U.S. Senate to serve as Director of the Federal Housing Finance Agency,” Otting said on Thursday in a statement. He added that “I am confident that Mark will do a great job leading the FHFA, as he recognizes the need to work toward a housing finance system that protects taxpayers and meets our nation’s housing needs.”
ANALYST COMMENTARY: Following Calabria’s confirmation, B. Riley FBR analyst Randy Binner initiated Fannie Mae with a Neutral rating and 12-month price target of $2.50. In a research note to investors, Binner said that while he believes that status quo on the regulatory front is most likely ahead of the 2020 elections, he expects the prospect of GSE reform to be a significant market topic.
Fannie Mae is positioning for privatization by lowering its mortgage portfolio risk through risk transfer deals and by growing guarantee fee income, furthering digitization and talent upgrades, and launching the new common securities platform, Binner said, adding that while there are significant political impediments to privatization, the combination of the current presidential administration and FHFA leadership likely provides “the best chance at reform that we will see for a long time.” He feels that Fannie Mae would “thrive” in the private market.
Fannie Mae is positioning for privatization by lowering its mortgage portfolio risk through risk transfer deals and by growing guarantee fee income, furthering digitization and talent upgrades, and launching the new common securities platform, Binner said, adding that while there are significant political impediments to privatization, the combination of the current presidential administration and FHFA leadership likely provides “the best chance at reform that we will see for a long time.” He feels that Fannie Mae would “thrive” in the private market.
However, Binner also noted the “political realities” of a reform plan that releases the GSEs from federal conservatorship and privately recapitalizes them are “significant.” While plans from Senator Mike Crapo and Moelis have vehicles to support the goal of affordable housing, any change to the GSEs is likely to meet with Democratic opposition on this issue. For Fannie Mae alone, Binner sees the need for a capital raise of about $85B, which would likely be facilitated by large Wall Street firms.
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