The Federal National Mortgage Association (FNMA) and the Federal Home Loan Mortgage Corporation (FMCC) are down more than 50% from their February highs. With many mortgages being skipped and still facing windows that may result in mortgage relief for the borrowers, it would be easy to assume that a decoupling of Fannie Mae and Freddie Mac might be more complicated than ever.
It turns out that the 2 GSEs have announced formal requests for proposal to hire financial advisers to assist them with upcoming capital raises.
If these come about, then Fannie Mae and Freddie Mac have given the highest signals possible that, despite the C-19 economic chaos, the Federal Housing Finance Agency (FHFA) is committed to finally releasing them out from under the government conservatorship status and making these entirely private companies.
A looking at the Fannie Mae release about a Request for Proposal shows that Fannie Mae is seeking to hire an underwriting financial advisor that would assist it in developing and implementing a plan “for recapitalizing and responsibly ending its Conservatorship.”
Both Fannie Mae and Freddie Mac have announced up to 12 months of mortgage forbearance, which would bring reduced or suspended mortgage payments that would be added on the back-end of mortgages.
It is also up for discussion how Fannie Mae and Freddie Mac would be able to conduct so much mortgage forbearance and lenience if these were independent companies operating without some form of government backing and oversight.
The report comes from Nomura/Instinet, and the firm’s analyst is expecting a projected capital raise in mid-2021. He also opined that both Fannie Mae’s and Freddie Mac’s stocks are at substantial discounts to his anticipated financial offering prices.
Nomura/Instinet still has Buy ratings on both GSEs, and Howlett expects a period of 120 days to 180 days turnaround on a capital rule before any finalization.
He also expects that the Treasury will convert its warrants into common stock at the future offering prices, and expects that junior preferred holders will agree to convert to common stock at the offering prices too.
Nomura/Instinet’s price target for Fannie Mae is 5/share and is derived from 6.6X its normalized Y 2021 earnings estimate and a 7% yield off of the firm’s projected dividend by Q-4 of Y 2023. Fannie Mae shares were trading up 5% at 1.77 recently, within a 52-wk trading range of 1.26 – 4.23. Its highest close around the selling wave was 3.62 on 14 February.
The firm’s price target for Freddie Mac is 4.50 and it was derived from 6X its normalized Y 2021 earnings estimate and a 7% yield off of a projected Q-4 Y 2023 dividend. Freddie Mac shares were up over 5% at 1.70, within a 52-wk range of 1.20 – 4.04. Its highest closing price around the beginning of the selling pressure was at 3.32 on 14 February. Stay tuned…
Have a healthy day, Keep the Faith!
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