...At Year's Beginning And The Future
Summary
U.S. District Court decision was only an action toward resolution in 2014.
FHFA directed F&F to begin refunding the National Affordable Housing Trust Fund.
2015 will see Republicans control both Houses, but still differ with the Administration.
Recommendation: Put your money to work in the market now.
I will attempt to discuss this issue with as little political flavor, but to highlight factors that will directly influence the outcome of the future of these Government Sponsored Entities (GSEs).
Fannie Mae (OTC: OTCQB:FNMA) and Freddie Mac (OTC: OTCQB:FMCC), which have been under federal conservatorship since 2008, have returned to profitability after a $187.5 billion U.S. bailout. The 2 GSEs have sent $225.5 billion back to the Treasury, which takes all of their profits each quarter.
There has been an abundant amount of noise about Fannie and Freddie just below the reporting of the mainstream media. Investors who have been holding the junior preferred shares, along with the common shareholders, have been waiting impatiently for years with little forward progress toward any resolution. Two years ago during our first reporting, we stated that it would take years to find a solution, and we continue to look forward to that time. My personal opinion is I hope the government releases the company back to its shareholders and repays the funds it has taken beyond the money the Federal Housing Finance Agency (FHFA), as the conservator, has given to the U.S. Treasury. However, my opinion is worth little and the laws of Congress and the Court system will determine the true outcome.
On September 30, 2014, the U.S. District Court dismissed claims brought against the federal government and U.S. officials for sending all profits generated by Fannie Mae and Freddie Mac to the U.S. Treasury. The dismissal included lawsuits brought by investors Perry Capital LLC and Fairholme Fund, managed by mutual-fund manager Bruce Berkowitz. In his opinion, U.S. District Judge Royce Lamberth said Congress had in effect given the Federal Housing Finance Agency, Fannie Mae and Freddie Mac's regulator, and the Treasury Department the power to take the companies' profits as a provision of the Housing and Economic Recovery Act.
This sent shock waves through the investor community as a huge sell off of the stock with the price dropping from a close of $2.88, the day before, September 29, 2014, to the close on 1 October of $1.70. Investors dumped as fast as they could, and since, a slight recovery to $2.28 on December 17, 2014. The decision was not unexpected, but the quick decision and direct response was sharp and clear in the wording of the decision. As of the open on January 5, 2015, Fannie's stock price is $2.19 and Freddie's price is $2.15.
On December 11, 2014, Melvin L. Watt, who oversees the companies as director of the Federal Housing Finance Agency, instructed Fannie and Freddie to start setting aside a portion of their revenue for the National Affordable Housing Trust Fund, the only source of U.S. housing money earmarked for the lowest-income families. The money for the affordable-housing fund will be set aside before the companies calculate their earnings. The money for the affordable-housing fund will be set aside before the companies calculate their earnings. States will be able to tap the fund primarily to subsidize rental housing for families living in extreme poverty. This is another way the current Administration is attempting to use the profits to fund government programs and draining any opportunity to return Fannie and Freddie back to its stockholders as a profitable investment.
Democratic lawmakers and housing advocates urged Watt, who served in Congress before taking over at FHFA in January, to allow the payments for low-income housing. Republican lawmakers sent him letters urging him to continue the ban. This will definitely become a political issue between the Parties in 2015, and likely to be decided by a veto and attempts to override the veto.
The Republicans are in control of both the Houses of Congress and are more likely to write bills that support shutting down Fannie and Freddie and stand up a new, single organization to release the government of all the current baggage of legal responsibilities and start anew. This is not likely to be a high priority; it may get support in 2015 or 2016. The downside would anger all the current holders of stock, as it would make their stocks worthless. The current administration would not support and likely veto any effort because the current quarterly profits go straight to the U.S. Treasury that help pay current expenses of the government. Without these extra billions each quarter, the fight between Congress and the White House over the budget would be more painful for Americans.
The outlook for any resolution is expected to drag beyond the 2016 election when new leadership sets a new course. Kicking this can down the road another two years is not only likely, but there is no solution on the table for lawmakers and the Administration to consider. The courts will continue hearing cases, but the courts know it is the responsibility of the Legislative Branch to write the laws and the Administrative Branch to execute. Any decisions they make will be changed when the new laws are finally written and passed.
Investors can anticipate little to no change in the next 2-3 years. There will be some cases heard and decisions released, but we expect the Judicial Branch to limit the scope of their decisions and at some point may 'encourage' the Congress and Administration to find common ground to a long-term solution.
Investors have heard from some analysts claim the stock may be valued as high as $60, but until this resolution, which is still years away, there is no hope of investors receiving dividends, or seeing the stock price appreciate to any real value. Only the speculators are holding on, hoping for a huge payday if it comes.
Fannie and Freddie shares will not pay a dividend to investors in 2015, and no stock price appreciation is expected until a true direction from the Legislative Branch and Administration all agree to action. Your money will sit idle for years, but the opportunity at the end could produce a windfall. It could also end up being a worthless stock.
Our recommendation is to look at the market, as this past year 13 of the 30 stocks on the Dow Jones Industrial Average (NYSEARCA:DIA) posted better than 10% in stock appreciation alone, not including the dividends. All three of the major markets posted record highs in 2014 and the U.S. economy is growing, with expectations of continued highs in 2015.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.
Editor's Note: This article discusses one or more securities that do not trade on a major exchange. Please be aware of the risks associated with these stocks.
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