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Fannie-Freddie Share Rallies Go Unchecked Amid Analysts' Doubt

Analysts warn that there’s a big difference between “the promise of a plan” to release Fannie and Freddie from government control and an “actionable proposal.”

(Bloomberg)—Analysts are casting a skeptical eye on reports the Trump Administration is working on a proposal that would recommend freeing the mortgage-finance giants Fannie Mae and Freddie Mac from government control. Those doubts are, for now, however, showing few signs of curbing share gains: Fannie is extending Friday’s rally to rise 18 percent in early Tuesday trading, while Freddie gained more than 16 percent. Both are at the highest since December 2017.

Here’s a sample of what some analysts are saying:

Compass Point, Isaac Boltansky

There’s “an enormous difference between the promise of a plan at some point in the future and an actionable proposal reshaping a vital cornerstone of the economy,” Boltansky cautions in a note. Many of his contacts have suggested Friday’s comments by Joseph Otting, acting director of the Federal Housing Finance Agency, were “simply the repackaging of a previously used talking point.”

Boltansky senses “that the broader structural reform conversation will ultimately yield to a narrower consideration of measured footprint reductions and GSE capital retention.”

He did not dismiss the possibility of the end to the GSE conservatorships, though odds still favor “continued conservatorship given the political undercurrents,” execution risk, and competing policy priorities, Boltansky wrote

KBW, Brian Gardner

“We do not expect the plan will be released until after the Trump administration’s nominee to be the permanent director of FHFA, Mark Calabria, is confirmed by the Senate, which we do not expect to happen until March. Furthermore, we think the details of the recap and release plan are still a work in progress.”

FTN Financial, Jim Vogel

“The changeover from Mel Watt to a new FHFA director was always going to stir up GSE headlines (and possibly confusion),” Vogel wrote in a note. “For now, we put this story temporarily in the ‘noise’ category while keeping a sharp eye out for further details of any official plan for the GSEs to leave conservatorship.”

Cowen, Jaret Seiberg

Cowen sees Otting’s remarks as “as overinterpreted,” and believes Otting “was restating Treasury’s long-held view that the conservatorship is not sustainable. We don’t see recap and release as imminent but agree that the GSE’s eventually will be allowed to retain more capital.”

Seiberg also flagged concern that “Otting is rattling the MBS investor market. There are understandable concerns among MBS investors about what happens to their holdings if there is a recap and release. There also are worries about buying future MBS if it might not be backed by the senior preferred capital lines. These are all issues that need to be clearly explained as part of any plan.”

He adds that the Trump administration “has never been radical when it comes to Fannie and Freddie. If [Treasury Secretary] Mnuchin wanted to act immediately, he could have done that two years ago.” Cowen believes “Treasury does not want to upset MBS investors or disrupt the housing finance system. Instead, it wants to encourage reform by letting the GSE’s slowly rebuild capital.”

Raymond James, Ed Mills

“Renewed GSE reform optimism likely overblown,” Mills writes. “We remain skeptical that there will be significant near-term changes to structures of the GSEs. While the exact plans of Otting, Treasury and the White House have not been released, the comments of Otting are consistent with past statements of Trump Administration officials. Previous attempts at GSE reform have been bogged down by political, legal and structural hurdles.”

Beacon Research

Otting is making “promises he cannot deliver,” Beacon analysts write in a note. “While we believe that Otting and his political patron, Mnuchin, believe that they can successfully release the GSEs, we disagree for multiple reasons.”

Those reasons include: Backlash against any recapitalization and release plan, which might hurt Calabria’s Senate confirmation. “Unilateral recap and release without congressional involvement will anger members of the Senate Banking Committee and they are sure to ask Calabria, a former staffer on the committee, whether he supports the Mnuchin/Otting plan or whether he has continuing concerns about ‘too big to fail.”’ That might box-in Calabria, with some critical Republican votes depending on “his promising to not pursue or continue any far-reaching reforms without Congress.”

Beacon also expects Otting/Mnuchin plan for recapitalization and release would be attacked by conservatives, which would then “reach the president via conservative media outlets.” Sees populist conservatives and progressives both going on the offensive against “vulture investors” profiting from billions of government support.

To contact the reporter on this story: Felice Maranz in New York at [email protected] To contact the editors responsible for this story: Catherine Larkin at [email protected] Brad Olesen, Will Daley


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