Dick Bove: Calabria Will 'Probably Seek Little' For Fannie And Freddie Common Shareholders

Government-sponsored enterprises Federal National Mortgage Association FNMA and Federal Home Loan Mortgage Corp FMCC have sprung back to life in 2019, with both stocks up more than 139 percent year-to-date. After years of disappointment for investors, one prominent voice on Wall Street now believes an end to the government conservatorship is finally near — but common shareholders may not be happy about it.

Calabria Nomination

Odeon Capital Group analyst Dick Bove said he believes Federal Housing Financing Agency head nominee Mark Calabria will be good news for Fannie and Freddie investors who are hoping for an end to conservatorship.

Calabria is the chief economist for Vice President Mike Pence and formerly served as deputy assistant secretary for regulatory affairs at the Department of Housing and Urban Development.

Calabria is a true libertarian, and his confirmation could create risk in the U.S. housing market, Bove said. 

“He is now advocating turning Fannie and Freddie into traditional banking organizations that have no support from the U.S. government. He continues to believe that the mortgage securitization model is a threat to the financial system,” Bove wrote in a Feb. 15 research report.

Calabria’s Potential Agenda

Bove said Calabria’s writing suggests he would take the following four actions if confirmed:

• Require the GSEs to recapitalize as traditional banks.
• Attempt to dial back government subsidies for residential mortgages.
• Seek some form of payment for preferred Fannie and Freddie shareholders.
• "Probably seek little" for Fannie and Freddie common stock shareholders.

“If I understand the appeals court position correctly, it sees no need to pay the common shareholders anything. There is no contractual relationship between them and these two companies,” Bove wrote.

The best hope for common shareholders is that the government itself holds warrants on 4.6 billion shares of Fannie Mae and 2.6 billion shares of Freddie Mac, and those warrants would essentially be worthless if the government opts to pay common shareholders nothing, the analyst said. 

As for the housing market as a whole, Bove said its stability may depend on how aggressive Calabria is in pursuing his libertarian beliefs.

“If the government pulled back on its implicit guarantee of 30-year fixed-rate mortgages, these financial instruments would disappear, driving housing prices lower and possibly causing a recession." 

Expert Take

TD Ameritrade senior trading specialist Shawn Cruz told Benzinga the wave of volume in Fannie and Freddie shares so far in 2019 indicates the market is expecting some kind of action from Washington in the near future.

“It's interesting because it seems like this is something from a legislative standpoint where you might have both sides come together just enough to unload that conservatorship,” Cruz said.

“I don't know what it will look like, but I do agree something is going on in the markets where there’s an expectation of a development that will involve a fundamental shift in how these companies are run.”

Fannie and Freddie shares experienced 795-percent and 529-percent month-over-month increases in dollar volume in the month of January, respectively. Some preferred shares of the two GSEs experienced more than 1,000 percent increases in dollar volume.

Calabria testified in front of the Senate Committee on Banking, Housing and Urban Affairs Feb. 14. Republicans on the committee appeared supportive of Calabria and his agenda, and he is expected to be confirmed to the position in coming months.

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