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Monday Morning Cup of Coffee: Fannie, Freddie crystal ball just got cloudier

Plus, is it time to buy the big banks?

February 1, 2016

Monday Morning Cup of Coffee takes a look at news coming across HousingWire’s weekend desk, with more coverage to come on bigger issues.

There has been much debate about the future or lack thereof of Fannie Mae and Freddie Mac, with opinions and declarations on Fannie and Freddie coming from the White House, Congress, trade groups, and other interested parties, just to name a few. The future of Fannie and Freddie even spawned an entire Twitter movement.

But all of those parties now have one fewer independent resource when it comes to knowledge and insight into Fannie and Freddie’s operations and the government-sponsored enterprises’ future prospects.

On Friday, FBR & Co. announced that it is dropping its analyst coverage of Fannie Mae and Freddie Mac because forecasting the results of the GSEs is, and will remain, “highly prohibitive” in the future.

According to the FBR note from analyst Paul Miller, FBR is dropping its coverage of the GSEs due a “reallocation of resources.”

In the note, Miller writes that it has been “difficult” to model the GSEs since they were put into conservatorship in September 2008, therefore it has been an extended period of time since FBR has had an operating model for the companies.

“Fannie Mae and Freddie Mac continue to be ingrained in the U.S. housing system, generating income through single-family businesses, multifamily businesses, and capital markets operations,” Miller writes. “While both have noted that they expect to be profitable on an annual basis for the foreseeable future, regulatory or legislative changes could have drastic, material impacts on each company's financial results in the future.”

And all that makes it very difficult to predict the future of the GSEs, Miller writes.

Additionally, Miller writes that while FBR is dropping its coverage of the GSEs, FBR is reiterating its “underperform” ratings for both Fannie and Freddie, and establishing a price target of $0.50 for each GSE.

“It remains difficult to ascertain value for common equity holders under the current structure, and as such, we reiterate our underperform ratings and price targets at the time of coverage elimination,” Miller writes.

Speaking of Fannie Mae and Freddie Mac, on Thursday, Feb. 4, a partnership of “local elected officials and community groups” will hold events throughout the country to call on Fannie and Freddie to stop the sale of delinquent mortgages to “Wall Street investors.”

The details on the demonstrations come courtesy of the Alliance of Californians for Community Empowerment, which said that rallies and press conferences will be held on Thursday in New York City, San Francisco and several other cities, with the goal of convincing Fannie and Freddie to sell their delinquent mortgages to non-profit housing agencies rather than to Wall Street.

“Community leaders are worried that these federal agencies are poised to hand these homes over to Wall Street for bargain basement prices, instead of to non-profits that would focus on keeping homeowners in their homes and expanding affordable housing,” the groups said in a statement.

“While deemed ‘bad debt’ by the sellers, most of these homes are still occupied and sit in communities where homeownership preservation and affordable housing is sorely needed,” the groups continued.

According to the statement, the group of elected officials speaking out on Thursday want these loans sold to “good actors” with a commitment to loan modifications with principal reduction and the creation of affordable housing.

Interestingly, a recent report from the Urban Institute presented the exact opposite argument.

The report, which came from the Urban Institute's Housing Finance Policy Center and is co-authored by HFPC Director Laurie Goodman and Center Creek Capital Group's Dan Magder, shows that private investors “can do more for borrowers” than the government or non-profits.

Goodman and Magder wrote that non-profits are limited in what they can do for borrowers.

“While non-profits have a role in helping delinquent borrowers, their limited capital and capacity suggests that their ability to significantly increase their share of (delinquent) loan purchases will be limited in the near-term,” they wrote.

And while the community groups may not the biggest fans of “Wall Street,” the nation’s biggest banks have one big name in their corner – Barron’s, which suggests that for investors “it’s a good time to bet on the big banks.”

The details on the Barron’s note come from Seeking Alpha, which recapped Barron’s report.

In the report, Barron’s analysts suggested that the ten biggest U.S. banks are currently trading at between eight and 12 times their 2016 estimated earnings, while the S&P 500 trades at 16 times.

And according to Barron’s, that gives a “20% upside” to Bank of America, Citigroup, JPMorgan Chase, Wells Fargo, Goldman Sachs, Morgan Stanley, BB&T, PNC, Suntrust, and U.S. Bancorp.

Barron’s lists each bank’s “manageable” exposure to distressed U.S. energy companies as a positive as well as the chance that the big banks may get broken up if either leading Democratic presidential candidate, former Secretary of State Hillary Clinton or Sen. Bernie Sanders, I-VT, are elected president later this year.

Both Clinton and Sanders have vowed to "rein in" Wall Street, with Sanders going so far as to say that his administration would “break up” those financial institutions “so that they no longer pose a grave threat” to the country’s economy.

But according to Barron’s note, that “possible eventuality” could actually be a positive for the banks’ investors because many trade at a dollar figure that’s “below their sum-of-parts.”

According to the Seeking Alpha note, Barron’s also “favorably” mentions the potential of Citizens Financial and Regions Financial.

Finally, the Federal Deposit Insurance Corp. reported no bank closures for the week ending Jan. 29, 2016.

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