by Michael IdeNovember 7, 2013
Fannie Mae / Federal National Mortgage Association (OTCBB:FNMA) has taken criticism from all corners for its role in the fiscal crisis, but it is also on track to repay the government bailouts it received and has been an important part of the recovery. Dueling Senate and House bills would eliminate or drastically alter both Fannie and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC), and current rules would bring its net worth down to zero in 2018. But Rafferty Capital Markets VP of Equity Research Richard X. Bove has released the first in a series of articles seriously considering investing in Fannie Mae.
Fannie Mae is financially stable
Even though Fannie Mae / Federal National Mortgage Association (OTCBB:FNMA) may not survive politically, it is financially healthy right now and it should be able to pay back everything it owes to the government in the first quarter of next year. If it were a normal bank rebuilding itself after the crisis and starting to really turn a profit, its share price probably would have already gone up. But it’s a government-sponsored enterprise and non-government shareholders are almost nonentities. They don’t have any say in operations and they are not entitled to any dividends. There doesn’t seem to be any reason to own the stock.
What makes Bove’s analysis interesting is that he doesn’t think this situation is either legal or tenable. If lawsuits asserting shareholder rights are successful than the government will either have to compensate people for their shares or change the rules and start paying out dividends.
Bove on why Fannie Mae is interesting
“There are bills in Congress to address these issues but they appear to be dead on arrival,” Bove writes. “The government has a program in place that would eliminate the entity. It will not stand. This is what makes this company so interesting.” more to follow
Equity Research Analyst, Rafferty Capital Markets, LLC
Mr. Bove, a distinguished industry veteran, covers the financial services and banking sector. Mr. Bove's research has received recognition from a number of industry sources over the years. He has appeared over 500 times in the past few years on the popular business channels. He is also extensively quoted in the print media. From time to time, Mr. Bove has been contacted by the banking regulators up to and including the White House for his thoughts on the industry. His work has been noted internationally in Europe, Asia and Latin America. Mr. Bove entered the securities industry at the end of 1965. Since that time he has held positions as a salesperson, analyst and director of research with firms such as Wertheim, Shearson, and Rafferty Capital Markets. For most of this period his focus has been on companies in the bank and financial sector but he has also covered building and business services companies...........
There are two bold statements here, and both carry a significant risk (Bove himself says he’s not yet confident enough to invest). First, Bove outlines the reasons that Fannie Mae / Federal National Mortgage Association (OTCBB:FNMA) is still important to the economy and shouldn’t be eliminated, but the current political landscape is so toxic that it could get the ax simply because no one is willing to spend political capital saving it. Second, the courts have to agree with his assessment that the current situation is illegal. Again, his arguments make sense, but that’s no guarantee the courts will break his way.