Fannie Mae, Freddie Mac Valuation Jumps After Capital Rule Finalized

Fannie Mae and Freddie Mac have seen their valuations climb in the days since the Federal Housing Finance Agency finalized the capital rule for them. Common shares of both government-sponsored enterprises climbed more than 30%, while their preferred shares increased by more than 10%.

Questions about Fannie Mae, Freddie Mac valuation

Analyst Dick Bove of Odeon Capital said he would've expected that the preferred shares of Fannie and Freddie would increase more than the common shares, although that's not what happened. He also continues to assume that a few significant steps would be taken that would impact the valuation of Fannie Mae and Freddie Mac preferred shares.

Bove continues to assume that the so-called "net worth sweep," which sweeps all of the GSEs' earnings into the Treasury, would be retired and considered repaid. He also expects that by the end of the year, Fannie and Freddie would owe no additional dividends to the government.

Bove also expects a consent decree that would allow the GSEs to operate for a set period of time without the amount of capital required by the finalized rule. Further, he expects Fannie Mae and Freddie Mac to start paying a set fee for the government guarantee of securitizations.

Fannie, Freddie must build retained earnings

If all of those assumptions come to pass, it would allow the GSEs to start building retained earnings, moving toward the combined $283 billion in capital they must hold under the finalized rule. Bove noted that if one annualizes Fannie Mae's and Freddie Mac's third-quarter earnings numbers, they could add $25 billion to $27 billion in earnings per year.

However, he also described that as an "overly generous assumption" because the third-quarter earnings results might not be replicated for some time and are seasonally high. Thus, he uses other techniques to come up with a valuation for Fannie Mae's and Freddie Mac's junior preferred shares.

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