Fannie And Freddie Watch: The Latest News Out Of Washington

Federal National Mortgage Association FNMA and Federal Home Loan Mortgage Corp FMCC shares are jumping Thursday. Bloomberg reported the Treasury is discussing having Fannie Mae and Freddie Mac retain a portion of the fourth-quarter dividend payments in an effort to begin recapitalizing the government-sponsored enterprises.

One Wall Street expert said dividend retention would be good news for Fannie and Freddie and would give the GSEs more options as the administration works through housing finance reform.

The Analyst

Height Securities analyst Edwin Groshans.

The Thesis

Fannie and Freddie have about $7 billion in dividend payments due to the Treasury by the end of the year, but Bloomberg reported they may be allowed to retain $2 to $3 billion.

According to Groshans, Fannie and Freddie may soon need this capital if the Republicans can successfully lower the corporate tax rate to 20 percent. In that scenario, he says Fannie Mae would endure a $12 billion deferred tax asset write-down, while Freddie Mac would endure a $6 billion write-down.

“This means that both companies will have to draw on Treasury’s preferred capital line of credit to maintain their capital buffer. Capital draw should still maintain,” Groshans said.

But even in the event of a tax-related capital draw-down, the fact that Fannie and Freddie may be allowed to retain capital for the first time since the Treasury implemented the net-worth earnings sweep is a step in the right direction for Fannie and Freddie shareholders.

“Capital retention by the GSEs is the first step towards 1) ending the net worth sweep and 2) exploring alternatives that can result in the GSEs retaining sufficient capital to exit conservatorship,” Groshans said.

Price Action

Fannie Mae and Freddie Mac stocks were both trading higher by more than 3.2 percent Thursday morning.

Related Links:

Bill Ackman: Fannie, Freddie Have Increasing Odds Of A Positive Resolution

What The New GOP Tax Plan Could Mean For Fannie Mae, Freddie Mac