Better Luck Next Year: Fast-Track GSE Legislation And Convocation Of Court Cases
Seeking Alpha - September 15, 2015 - September 16, 2015
By Wayne Olson
Cheyenne Hopkins of BloombergBusiness wrote that “[Senator Bob] Corker has won his party’s support to fast-track his legislation prohibiting Treasury from selling or liquidating preferred shares in the U.S.-owned mortgage companies, a step that could see it passed without debate, according to a Senate aide who request [sic] asked not to be named.” It is simply not true that Freddie Mac (OTCQB:FMCC) and Fannie Mae (OTCQB:FNMA) are “U.S.-owned mortgage companies.” To state what should be obvious, FMCC and FNMA are market-traded common equity securities that are, but for the 3rd Amendment, entitled to the residual after the firms’ other obligations are paid.
It is true that there has been a de facto nationalization of Fannie Mae and Freddie Mac (together known as the government sponsored enterprises or GSEs) via the Senior Preferred Stock Purchase Agreements (SPSPAs) between U.S. Treasury and the Federal Housing Finance Agency (FHFA). Moreover, the 3rd Amendment to the SPSPAs features a “net worth sweep” that sweeps all of the GSEs’ earnings to the coffers of the U.S. Treasury and prevents the GSEs from recapitalizing. This has the economic effect of directly expropriating investors in GSE common and preferred stocks on a quarter-by-quarter basis, as GSE earnings are swept to Treasury. But, it is foolishly simplistic to say that the GSEs are “U.S.-owned mortgage companies.”
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