Tilson: Fannie Mae 'Reminds Me Of My Best Investment Ever'

Since former hedge fund manager Whitney Tilson made a bullish call on Federal National Mortgage Association FNMA and Federal Home Loan Mortgage Corp FMCC on Sept. 5, the two stocks are each up more than 40%.

In his newsletter this week, Tilson reiterated his bullish stance that GSE shares are underpriced and said Fannie Mae reminds him of his best investment ever, General Growth Properties.

Background

Since 2012, every cent of earnings by Fannie and Freddie have gone directly to the Treasury as part of their ongoing conservatorship. Earlier this month, however, an appellate court overturned a previous ruling upholding the legality of the Treasury’s “net worth sweep” of Fannie and Freddie’s profits.

Shortly thereafter, Treasury Secretary Steven Mnuchin said the Treasury is negotiating with the Federal Finance Housing Agency, and expects a deal to end the net worth sweep “by the end of the month.”

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.

Tilson’s Take

Tilson said Fannie Mae reminds him of General Growth Properties because GGP filed for bankruptcy not because of insolvency, but because of illiquidity.

Tilson bought GGP stock for 67 cents per share in early 2009 shortly before the company was forced into bankruptcy because it was unable to pay its debts. At the same time, Tilson said GGP’s mall properties continued to generate plenty of cash flow throughout the crisis.

“Thus, even though the company wouldn't emerge from bankruptcy until November 2010, investors bid the stock up once the panic passed because they could see the value of the underlying business above and beyond its debt,” Tilson said in his newsletter.

As the share price rose, it became easier for the company to raise capital via equity offerings because it could sell shares at a higher price.

“I think we're at the beginning of a similar virtuous cycle for the GSEs,” Tilson said this week.

Benzinga’s Take

After more than a decade in limbo, the long-term outlook for Fannie investors has significantly improved in the past month. At this point there are still plenty of unanswered questions about the details of the recapitalization plan, including the fees, the timeline and the potential dilution involved in the process.

Do you agree with this take? Email feedback@benzinga.com with your thoughts.

Related Links:

Analyst Raises Fannie Mae Price Target Following Mnuchin Comments

Why Fannie And Freddie Sellers May Be Misinterpreting Housing Reform Plan