Monday, May 5, 2014

Ackman At Sohn: Get Off Our Fannie

Investor Bill Ackman, who knows a thing or two about real estate, just made the case for reforming Fannie Mae (FNMA) and Freddie Mac (FMCC) but keeping them independent of government control.

Bloomberg News

Here it is:

The government-sponsored enterprises "are vital today." Fannie and Freddie is two businesses:  the main one is pooling mortgages, putting them in a trust, issuing bonds and guaranteeing interest and principal. Fannie and Freddie take the credit risk for the borrower and create low-cost mortgages with their huge scale. Says Ackman: They create the securitization for mortgages that otherwise would be a huge drag for banks. They provide financing access to middle income people. Without them, we wouldn't have a mortgage market.

"We like this business because it has low liquidity risk … they are not exposed to regional housing risk, and" a national downturn, despite the recent one, is rare, Ackman says.

On the other hand, the fixed-income arbitrage business, which requires very little capital "is a bad business," Ackman said He argued that Fannie and Freddie have paid $203 billion in dividends back to the government, but that if housing finance reform is accomplished, Fannie and Freddie would need $500 billion to meet requirements – "impractical" and "not viable," Ackman said.

Banks aren't likely to step in and provide meaningful amounts of mortgages, he says, because they can't support themselves with floating-rate deposits to support 30-year loans at fixed rates. A new system to replace Fannie and Freddie would need to be tested in another crisis, and that could be decades off.

"We think the most important thing is to maintain the 30-year mortgage, or the economy collapses. We propose a 250-basis-point capital requirement, or almost 5 times what they had before – a fortress balance sheet. The industry will be massively overcapitalized. And, wind down the fixed-income arbitrage business," Ackman said, adding: "This is a remarkable company if reformed, with profitability drivers. The recurring earnings power: $17 billion, and it can be more profitable as fees increase."

Fannie and Freddie need to raise about $183 billion in capital. Where will that come from? Fannie and Freddie are earning it and can recapitalize the business over the next 7 to 10 years, Ackman says.

Stocks are $4, and they are $23 stocks – and could go into the $40s.

The taxpayer owns 79% of these companies – and all told, an even higher percentage goes to taxpayers as the stocks improve, Ackman says.

Bottom line: "Affordable housing is important. We have a choice, and if the U.S. government takes over Fannie and Freddie, it would be a disaster for jobs and U.S. debt. His conclusion: we should "get off our Fannie."

Shares of Fannie Mae have gained 3% to $4.10, while Freddie Mac has jumped 6.3% to $4.23.

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