The Distraction Behind the Delisting of Fannie Mae and Freddie Mac

For the long suffering shareholders of the GSEs, Fannie Mae and Freddie Mac, the news of the FHFA directive to delist from the NYSE and other exchanges likely feels like the last nail in the coffin. For them, it just might be. But for mortgage finance it’s proving to be little more than a distraction. To use the words of Bert Ely, of the monetary consultancy firm Ely & Company: “It’s no big deal.” Ely has been fending off calls from journalists all day trying to get him to say otherwise, but he won’t mince his words. “It’s fiction that these shares have any real value anyway,” he said. “It was a pipedream that the government would stand next to the preferred shares, much less common ones.” In looking over quarterly reports Ely notes that the senior preferred (read: Fed money) is only slightly more than the net worth. This is indicative of a mortgage finance company with no real equity. In essence, and let’s be honest here, considering the GSEs are often positioned as an instrument of political housing policy, what really matters is not the wider bid-ask we’ll see on the back of this announcement. And yes there will be less trading and therefore less liquidity. But what really matters here is the ability of the GSEs to continue to sell mortgage-backed securities (MBS). “FHFA’s announcement prominently featured a disclaimer the decision doesn’t mean anything about the companies, but most observers would disagree,” wrote Jim Vogel in a note from FTN Financial, adding the firms will continue to file with the SEC. “The spin of several recent FHFA announcements and decisions actually more closely aligns GSE liabilities — both debt and MBS — with the federal government’s policy interests,” Vogel adds. “It’s an odd way of showing support, perhaps, but it’s the better of two possible interpretations.” And that is exactly with what we are left with: interpretation. Case in point, in an outlook report released by Deutsche Bank today, a huge problem confronting the Agency MBS space is regarding fails, that is, when securities that are supposed to be delivered or received on a given date are not actually delivered or received. Pankaj Jha, residential MBS analyst at Deutsche writes that fails undermine the smooth functioning of the MBS market, creating headaches for investors and dealers, if not always losses. The problem is that GSE fails are at an all time high with no signs of abatement: Even more worrying is Jha’s point that, “it is important to realize that one fail will ordinarily set off a chain of fails. A fail problem is rarely confined to one dealer failing to another dealer or customer.” Today’s announcement of course would seem to have nothing to do with problems such as these. But it’s clear that the effort to distract did not go unnoticed. As Vogel puts it, the “various legislative feints and thrusts to “close down” the GSEs are supported in part by the market’s treatment of the two as viable economic entities. Moving the stock quotes to the OTC market might make the whole mess less obvious.” Agreed. But the real situation is this: the GSEs are nationalized. And the new owners have no real idea of what to do with them. That’s the challenge of the day, not delisting. It’s a challenge that so far is getting plenty of discussion, but no real solution. Jacob Gaffney is the editor of HousingWire and Write to him.

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