Movement on plans for an offering of shares from government-sponsored enterprises Fannie Mae and Freddie Mac is likely to be tabled until after the midterm elections, according to a Wedbush report.
"The only discussion we are expecting from the administration regarding these two until after the midterms, if at all, is around the issue of lowering mortgage cost for residential borrowers," Henry Coffey and Michael Piccolo, analysts at Wedbush, wrote in a report published Friday.
The Federal Housing Finance Agency and Treasury could still stage what would be the first secondary
But the analysts' forecast suggests the administration's shift in focus, congressional opposition and current low trading prices make what officials loosely refer to as an initial public offering unlikely in the near term.
What's changed
Fannie's stock, which recorded a 12-month high above $15 per share last September, was trading at $5.88 at the time of this writing. Freddie's stock hit a 12-month high above $13 per share last fall and was trading at $5.16 midday Friday.
Coffey also revised his view on converting the Treasury's senior preferred shares to common and deeming them paid in light of
However, the analysts also wrote that they don't foresee the GSEs standing still, noting that inaction could amplify legal risks related to legacy investors as exemplified by
What the analysts anticipate will be the most likely path is one in which the GSEs retain earnings over seven to 10 years until they meet regulatory capital requirements. This could involve a dividend paid on the senior preferred stock.
"It is a compromise which creates some value for everyone," they wrote.
Based on the current finding of capital building as the most likely outcome for the GSEs, the Wedbush analysts lowered Fannie's price target from $13 to $8. Freddie's price target dropped from $13.35 to $12.
"FMCC will generate common equity faster than FNMA and have to generate less of it on a relative basis," they added, explaining why Freddie's price target is higher than Fannie's.
Those targets still make current trading prices relatively attractive, according to the analysts.
"We think there is enough upside in the shares of both at current price levels, to warrant purchase," they wrote.
However, the analysts also noted there are risks to consider when it comes to the two GSEs' shares.
"The primary risk factors facing these two rest principally with the uncertainty over what course the administration ultimately takes, when it is likely to move forward and what value it places on the senior preferred," they wrote.
Other paths the GSEs could take
The Wedbush analysts said there are other possible scenarios for the GSEs where they get recapitalized and released from conservatorship. One they are looking into would involve spinning off the multifamily businesses.
Although some such as billionaire Bill Ackman have backed off the idea that the GSEs' operations could be combined, the analysts have said that move could still be on the table for the single-family business given that such could help rebuild return on equity more quickly.
"We think the combined residential platforms would generate higher ROEs and a faster path to meeting targeted capital requirements," they said,
The utility model some members of congress and the industry have backed as one that does not require two players, the analysts noted.
The fate of various congressional GSEs proposals also could shape the path the enterprises take.
"The involvement of both sides of Congress in the residential mortgage discussion could lead to some interesting outcomes," the analysts said, pointing to bills aimed at reducing building costs, minimizing institutional investors' role, and expanding financing for manufactured housing.
