Fannie Mae, Freddie Mac 500% Price Appreciation Or Bust: Bove

In his latest update on Federal National Mortgage Association OTCBB:FNMA, Richard Bove of Rafferty Capital Markets examines the implications of the winding up of Federal National Mortgage Association OTCBB:FNMA, and its sibling Federal Home Loan Mortgage Corp OTCBB:FMCC, in the event politicians in Washington have their way.

Read about ValueWalk's previous coverage on this issue here.


Washington's 'too-big-to-fail' fears

Earlier this month, National Economic Council Director Gene Sperling said President Barack Obama would reject proposals by hedge funds to take over Fannie Mae and Freddie Mac. "I want to make clear, the Obama administration believes the risks are too great that this model would recreate the risks of the past," he said. He clarified that their size and infrastructure would enable the two GSEs to stifle competition and raise entry barriers within the securitization market. “All of us should fear that we could re-create a duopoly that the market would perceive as too-big-to-fail market entities with an implicit government guarantee, the core of the failed GSE business model we are trying to replace,” he said.

Hedge funds investors such as Bill Ackman and Bruce Berkowitz have acquired substantial chunks of the publicly available common and preferred stock in the two companies and have proposed to take over their business.

Bove on the implications

Bove's research finds the practical realities of the mortgage finance business make the government's proposed actions untenable. The simple fact is that the 20/30-year FRMs, essential elements of America's housing finance industry, would cease to exist in the absence of buyers such as Freddie and Fannie.

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