Federal National Mortgage Association FNMA and Federal Home Loan Mortgage Corp FMCC had another big day on Wednesday after investors got some much-needed clarification following last week’s release of a somewhat lackluster Trump administration housing reform plan.
Shares of Fannie Mae and Freddie Mac are each up roughly 30% this week after a key court ruling and testimony by Treasury Secretary Steven Mnuchin have investors feeling much more optimistic about the companies’ future.
Positive Developments
On Friday after the market close, an appellate court overturned a previous ruling upholding the legality of the Treasury’s “net worth sweep” of Fannie and Freddie’s profits. Since 2012, every cent of earnings by Fannie and Freddie have gone directly to the Treasury as part of their ongoing conservatorship.
Investors have sued the Treasury claiming the the net worth sweet was implemented illegally, and Friday’s ruling opens the doors for investors to pursue claims that profits were seized unlawfully.
Following last week’s ruling, Mnuchin said this week he is now negotiating with the Federal Finance Housing Agency, and the Treasury now expects “a near-term agreement to retain their earnings.”
Mnuchin told the Senate Banking Committee that his proposal would be to allow Fannie and Freddie to recapitalize their balance sheets in exchange for a fee paid to the Treasury for its ongoing support throughout the process.
Experts Weigh In
Former hedge fund manager Whitney Tilson said this week the court ruling is a major step in the right direction for Fannie and Freddie investors and has applied significant pressure to the Treasury. Tilson originally recommended Fannie Mae shares to his newsletter subscribers last Thursday, but recommended they take only a 1.5% stake.
Tilson said Fannie Mae shares should be up 50% following Mnuchin’s comments.
“It’s clear that investors don’t yet fully appreciate the implications of this ruling. That’s why today, we recommend buying the second half of the position, making it a 3% holding,” Tilson wrote Tuesday.
B Riley analyst Randy Binner said Wednesday he remains cautious on the outlook for Fannie Mae given all the risks involved in the recapitalization process. However, Mnuchin’s comments were positive enough for him to raise his price target for Fannie Mae from $2 to $3.
“This is a speculative call, but we view FNMA common and preferred securities as a call option on a large and increasingly sophisticated financial company that we believe would thrive in the private market,” Binner said.
B Riley maintains a Neutral rating for Fannie Mae stock.
Benzinga’s Take
If Fannie Mae eventually gets released from government control, it could be a huge home run for investors. However, how, when or if that actually happens is a gamble until a clear plan is officially in place. Regardless, recapitalizing the balance sheet will be an extremely long process, making Fannie Mae a high-risk/high-reward lottery ticket play at this point.
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