Analysts have largely
Mizuho initiated coverage of both government-sponsored enterprises with a $10 price target for Fannie and $9 for Freddie. It forecasts two possible paths for a conservatorship exit. One unlocks some stockholder value within a couple of years. The other may mean "common shareholders earn zero through 2033."
(Some analysts refer to the GSEs as "earning zero" from a shareholder perspective because their conservatorship structure blocks investors from some access to their profits even though their actual financial results have been consistently strong for years. )
"Our base cases assign 30% FNMA/20% FMCC probabilities of a 'fast exit' by '28," the Mizuho researchers wrote, noting that while the GSEs' earnings show they are "among the best businesses one could hope for," the odds are against quick action.
Reflections on recent financials
Strong financial earnings at both companies nevertheless had driven their shares higher through the time of this writing on Monday.
"Single-family was the standout segment on
Following last week's earnings, they downgraded Fannie to neutral after its stock price rose, outpacing an $8 per share price target. They affirmed Freddie's outperform rating and price target of $12 per share.
However, Mizuho noted that multifamily does generally offer some upsides, contributing additional guarantee fees and other strategic advantages.
"MF, while smaller at 13% of the combined book, adds important diversification: higher g-fees (74 basis points for FNMA, 56 bp for Freddie Mac), built-in lender risk-sharing and counter-cyclical demand dynamics," Dan Dolev and Alexander Jenkins, the analysts at Mizuho, wrote.
But the Mizuho analysts noted that the GSEs' political prospects may be more important to investors than their financials.
"These stocks do not trade on business fundamentals in our view. They trade on a single binary variable: the probability that the federal government resolves a 17-year conservatorship in a manner that leaves residual value for common shareholders," they said.
Current conservatorship forecasts
Some analysts have noted there could be concerns for investors even if the GSEs do leave conservatorship and become more like private entities with public shares.
"We maintain our underperform rating given our belief that the current risk-reward backdrop skews negatively for the common shares since there is significant downside risk if privatization fails and significant dilution risk if it succeeds," Keefe, Bruyette & Woods wrote in a recent note on Freddie's earnings.
Mizuho joins experts focusing on a change in capital standards and deeming the senior preferred shares paid as likely being necessary for a "fast" exit that could benefit shareholders as opposed to a slow one. The senior preferred shares are a key sticking point in the conservatorship structure for investors. Meeting current capital standards could take several years.
The analysts from that company suggest a fast exit would involve resetting the current minimum capital standards to 2.5% of risk weighted assets, which would put net worth requirements at a level Fannie Mae already exceeds and Freddie Mac likely could within one year of earnings retention.
However, the mortgage-backed securities purchases the GSEs have committed to in order to support the home loan market have increased risk-weighted assets and complicated the process.
"The tension between the administration's housing policy objectives and its privatization goals is the central near-term uncertainty," the Mizuho analysts wrote.
