Everyone has an opinion on Fannie's future, one firm offers a rating

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Discussion of releasing the government-sponsored enterprises from conservatorship has reemerged as a hot topic both in Washington and on Wall Street. Whether or not those talks will result in significant policy change remains, at best, a guessing game.

But at least one investment bank thinks the prospects of privatization have improved enough that the equity in Fannie Mae has become sufficiently interesting to merit the attention of its analysts.

B. Riley FBR on April 4 initiated equity coverage on Fannie Mae as the chances for privatization of the GSEs improved in a housing finance reform package.

While the rating and price targets it assigned to Fannie are less than inspiring (the price target implies a 14% decline in shares over the next 12 months based on the April 4 closing price), the move nonetheless adds a new voice to the chorus predicting — or in some cases pleading — for Fannie's release from government conservatorship.

"While there are significant political impediments to privatization, the combination of the current presidential administration and FHFA leadership likely provides, in our opinion, the best chance at reform that we will see for a long time, and many believe that conservatorship is not sustainable long term," said analyst Randy Binner in his report.

GSE reform proposals from Moelis & Co. and Senate Banking Committee Chairman Mike Crapo, R-Idaho, form the basis for Binner's investment thesis.

"In the reform scenario we lay out, Fannie and Freddie would most likely operate as private mortgage insurers/guarantors," the report said. "There is a possibility that the multifamily operations of each entity could be spun out and separately act as private guarantors, but we have not specifically incorporated this into our analysis. Other guarantors in the residential mortgage space could include nonbank financials, such as insurers (Arch Capital, AIG, et al.), nonbank lenders (Quicken Loans, Freedom Mortgage, et al.), and new entrants designed and capitalized for these types of operations."

Still the status quo for any housing finance reform efforts prior to the 2020 election is likely, the report notes. The investment thesis is wrapped around a 25% probability of regulatory reform.

Fannie Mae would need approximately $85 billion in additional capital if it were to be privatized, "which would likely be facilitated by large Wall Street firms," Binner said.

The report was issued just prior to the Senate vote to approve Mark Calabria as Federal Housing Finance Agency director.

"We will look to the early months of Calabria's tenure, further details on the capital conservator framework, the Crapo housing reform outline and the recent White House directive as potential catalysts that could affect trading in Fannie Mae securities," Binner said.

Many of the comments and observations could apply to Freddie Mac, Binner said, but coverage was initiated only on Fannie Mae at this time in order to stay focused on specific matters relating to that stock.

Binner is bullish for the future of the private mortgage insurers in his reform scenario because of the tremendous amount of capital needed for Fannie Mae, and an expected mandate to support housing availability and affordability.

B. Riley FBR's rating on Fannie Mae is neutral, with a 12-month price target of $2.50 per share. Both Fannie and Freddie's stock has closed trading above $2 since Jan. 18. On April 4, Fannie Mae closed at $2.90 per share, while Freddie Mac closed at $2.73.

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Housing finance reform GSEs Stocks PMI Mark Calabria Mike Crapo FHFA Fannie Mae Freddie Mac