A potential Supreme Court ruling on the Federal Housing Finance Agency's constitutionality improved the stock rating of the GSEs.
Even the possibility that the High Court would declare the government's order for Fannie Mae and Freddie Mac
"Our sell ratings on Fannie Mae and Freddie Mac were based on COVID-19 earnings pressure and potential dilution from recapitalization," Randy Binner, an analyst for B. Riley FBR, said in a report.
"This potential court action would likely trump financial considerations and introduces a binary outcome that is more consistent with neutral ratings on the common equity, in our view," Binner wrote.
The price target for both companies' common stock was raised to $2 per share from $1 per share.
Both companies
In the latest report, Binner argued that the government's actions around the GSEs have always been questionable. The Supreme Court's re-examination of the
Binner added that given the court's ruling in
"While a recap could still be highly dilutive for Fannie Mae and Freddie Mac common [stockholders], the junior preferreds have much less dilution risk, and this court action could be materially constructive for the junior preferreds," Binner continued.
While the cash sweep of earnings has been
The Biden administration once again extended the pause on student loan payments enacted to help borrowers during the COVID-19 pandemic, this time through the end of August.
The two states' combined plans amount to over $1.5 billion of the Homeowner Assistance Fund included within the American Rescue Plan Act , which was passed a year ago.
An uptick in pandemic-related payment suspensions reflecting new or restarted plan activity previously occurred as the omicron variant spread, but activity has since subsided.
"The forgiveness of the senior preferred agreement, which has effectively been paid back at this point, is a key catalyst needed for recap and release to move forward," Binner said. The net worth sweep has sent
Second-quarter earnings at both companies should be in line with the earnings per share they reported for the first quarter, Binner predicted. Fannie Mae had
The report included four possible recapitalization scenarios for the GSEs based on possible election outcomes.
If President Trump is re-elected and the Republicans maintain control of the Senate, "recap and release likely moves forward, Mnuchin and Calabria likely stay in place past 2020, and capital raises start in 2021," Binner said, noting that a write down of the senior preferred stock would be likely.
In the next scenario — a win for former Vice President Joe Biden, but the Republicans keep the Senate — recap and release will be delayed and both Mnuchin and Calabria will be replaced. Binner expects "more progressive use of GSEs likely, which could impact earnings but overall status quo with senior preferreds in place."
But if Biden wins and control of the Senate flips, there will be no recap and release, with "socialization of the GSEs and profitability profile sacrificed to promote affordable housing," Binner said. There will be very little value in the common and junior preferred stock in this scenario.
The final scenario is termed a "lame duck maneuver" the current administration could undertake if Biden wins. "Treasury exercises its warrants and pushes [a] privatization plan, but it is not clear what [the] capital requirements would be, and this could cause disruption in the mortgage market," he said.
