Some have argued that if President Donald Trump loses the election, Fannie Mae and Freddie Mac will be left in conservatorship instead of recapitalized and released. However, Tim Pagliara of CapWealth Advisors has argued that even if Joe Biden wins the election, he believes the government-sponsored enterprises will still be released.
Now it seems analyst Dick Bove of Odeon Capital agrees with him, although he disagreed before. He said in a recent report that regardless of election’s results, the winner needs the housing market to be strong, and that requires Fannie Mae and Freddie Mac to be in good shape.
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Fannie Mae, Freddie Mac preferred shares fall as election nears
Bove pointed out that interest in Fannie Mae’s and Freddie Mac’s preferred shares has been lackluster for quite some time, and he believes the election is to blame. He said that anecdotally, there appears to be more sellers than buyers.
He added that this is confusing because of the breakthrough that has brought one of the cases filed over the GSEs before the Supreme Court. He said the outlook for plaintiffs in the courts “has never been as favorable as it is today.”
He assumes that interest in Fannie Mae’s and Freddie Mac’s preferred shares is low because it looks like Biden will win the election and like Democrats will also take control of the Senate. It is widely believed that if the Democrats are in power, the GSEs will remain in conservatorship, so investors may think that buying their preferred shares would be a mistake.
However, he suggests that investors step back from the battle in the election and see the broader picture for Fannie Mae and Freddie Mac. He noted that both candidates need a strong economy in 2021, and that strength could come from housing. However, for that to happen, Fannie and Freddie must be strong, which suggests that there must be a resolution to their issues no matter who is in the White House.
Getting Fannie and Freddie out of conservatorship
Bove pointed out that the Federal Housing Finance Agency is certainly committed to getting the GSEs out of their conservatorships. It has put sizable amounts of resources toward that goal and hired knowledgeable people both in-house and as consultants to push forward the effort. It has also forced Fannie and Freddie to do the same, and they have ramped up hiring.
He believes it would be “shocking” if the many advisors and analysts who are advising the FHFA on getting the GSEs out of conservatorship would tell the agency that they could hold public offerings for Fannie and Freddie if the net worth sweep were still in place. He believes the net worth sweep and the junior preferred shares are holding hostage everyone who wants to end the conservatorships.
However, Bove now believes everything with Fannie Mae and Freddie Mac is on hold until after the results of the election are known. He sees that as a mistake and that the economic realities “will force the same result whether the Democrats or the Republicans hold power.”
“Housing is the key to a strong economic recovery, and Fannie Mae and Freddie Mac are the keys to a housing recovery,” he wrote.
Why the election may not matter for Fannie Mae and Freddie Mac
Bove noted that housing has a major impact on GDP, which has taken a hit due to the pandemic. Data indicates that construction and fees associated with transferring ownership of homes provide boosts to the GDP. He only had data for the impact of construction, but he said other sources have estimated that construction costs are less than half the impact of a housing boom has on GDP, although that could not be validated.
He added that what drives housing is the availability of mortgage funds. Numbers from the Federal Reserve show that the growth pattern from 1952 to the 2008 collapse was smooth, but it hasn’t been smooth since then. He explained that the government has been the driver of change and innovation in home finance in the U.S. for many decades.
He estimates that the government led the growth in housing activity in the past 90 years except during the 2000 to 2005 cycle when all the controls were off, and money flowed from other sources. For the last 12 years, there have been no innovations in home finance. Thus, in order for the housing industry to get back on track and provide a much-needed boost to GDP, the government needs to take the lead.
He noted that demand in the housing industry remains strong as the demographics and money supply remain strong, and interest rates remain close to record lows. Further, people are moving out of cities due to COVID-19, and people need more living space to work at home.
Here’s what will be needed
TO meet the demand in housing, Bove said the housing finance system must be readjusted.
“Quite simply we must have private entities that issue mortgage-backed securities with quasi government guarantees,” he wrote. “The government does not have the ability to grab even more trillions of dollars to fund housing growth. The private sector does have this money.”
Thus, he believes that no matter who wins the election, they will need to bring Fannie Mae and Freddie Mac out of conservatorship. If the housing industry is going to grow, the private sector must be tapped for the trillions of dollars that are available.
In order for that to happen, the GSEs must return to an arrangement similar to what they had before they were swept into conservatorship. And for that to happen, the net worth sweep has to be eliminated, and the companies’ capital structure must be “re-invigorated.”
“Like it or not, Republican or Democrat, this must happen to put people back to work and grow the economy,” he explained. “Housing is a wholly domestic industry. Fearing that a change in the Administration will derail this process may be a mistake.”
