Should i buy fnma stock 2017

Nov 10, By James Kleimann. Latest Articles. Nov 12, By Matthew Blake. Nov 12, By Brooklee Han. Nov 11, By Brooklee Han. Sponsored Content. How digitizing the lending experience can optimize margins. How lenders can effectively serve the changing demographics of borrowers. Log In. That would also be true if a federal backstop was available to more firms than just the two GSEs.

The prospect of higher growth in annual earnings after recapitalization would increase the value of the GSEs to investors, making it easier to recapitalize them through the sale of common stock and to repay the Treasury for its stake in the enterprises. Another important consideration is how new capital requirements will treat transactions that the GSEs currently use to transfer some of the credit risk of their guarantees to investors.

But for simplicity in this analysis, CBO used one value for all assets—representing the weighted average of potential capital requirements for specific types of assets unadjusted for the risk of those assets. Because capital requirements are set as a percentage of assets, larger asset balances increase the amount of capital necessary. In addition, under risk-based capital requirements, riskier assets require more capital, consistent with the approach that the federal government uses for other financial institutions that it regulates.

CBO used such estimates for and later years. But in , the coronavirus pandemic and responses to it may reduce the amount of earnings that the GSEs can retain as capital see Box 2.

The resulting ratio of capital to assets unadjusted for the risk of the assets was only 0. But that figure was much higher than the unadjusted capital ratio of 0. Fannie Mae and Freddie Mac also reported that between 0.

That share was down from about 1. It also announced that the GSEs would suspend foreclosures during the crisis. As a result, their combined capital remained about the same at the end of March as it had been at the end of December Both GSEs reported higher net earnings in the second quarter of than in the first quarter.

In their second-quarter earnings reports, both GSEs emphasized the uncertainty of their financial outlook because of the economic effects of the coronavirus pandemic. In addition, investors might increase the rate of return they require on capital invested in the GSEs, recognizing the risks associated with housing guarantees in an era of large-scale forbearance and a moratorium on foreclosures.

In all, those circumstances could make recapitalization more difficult for the GSEs than it would have been before the coronavirus outbreak. Prior to CECL, the GSEs increased their reserve for potential losses by showing an expense on their income statement, which reduces net earnings once an asset became impaired.

Under CECL, they must increase their reserve for expected losses once an asset is acquired. The fee, which will equal 0. Investors other than the Treasury currently hold about 1. All of those shares were issued before the conservatorships. Investors weighing whether to buy common stock in Fannie Mae or Freddie Mac would require a rate of return on that investment commensurate with the perceived risks. First, no exact proxy exists for investors to look at because no private firms perform precisely the same business function as the GSEs—guaranteeing mortgage-backed securities with government sponsorship.

Second, the nature of the relationship between the GSEs and the federal government might not be resolved before the common-stock sale, leaving investors unsure about the amount of oversight and competition the privately held GSEs might face. Despite those difficulties, investors would probably look at estimated returns on capital for similar firms in the banking, real estate, and insurance sectors to help determine their own requirements for returns from the GSEs.

Investors typically use the expected rate of return to discount the future income they expect to receive to calculate its present value.

Thus, higher required rates of return would decrease the value of the GSEs to investors, making it harder for the GSEs to recapitalize through common-stock sales and to repay the Treasury for its stake in the enterprises. In this analysis, CBO did not incorporate the effects of any specific administrative or legislative actions during the recapitalization period.

In the two options that CBO analyzed, the preferred-share agreements would be modified to allow the GSEs to retain all of their earnings and to eventually pay dividends to holders of common stock sold as part of the recapitalization process. One way in which the Treasury could modify the agreements would be to convert its preferred shares into common shares, into warrants for common shares, or into some form of debt in the GSEs.

That approach is the one used in the options that CBO analyzed for this report. Whether or when the Treasury would exercise its warrants to buy common stock in the GSEs for a nominal amount is also unknown. Either choice would affect the number of common shares outstanding and the dividends available to holders of those shares, which in turn would affect the price that investors would be willing to pay as part of the common-stock sale. For this analysis, CBO estimated that the Treasury would not require payments from the GSEs during the period when they were retaining their earnings prior to the common-stock sale.

The factors described in the previous section create uncertainty in modeling how recapitalization would occur and how the federal government would be compensated for its support of the GSEs. In its modeling for this analysis, CBO used specific values point estimates for some of those factors based on the recent performance of the GSEs see Table 1.

For other factors, CBO used a range of values and created multiple scenarios with different combinations of estimates from those ranges. CBO repeated that process for both of the illustrative options it analyzed—three years of retained earnings followed by a common-stock sale in , and five years of retained earnings followed by a common-stock sale in The simulations yielded the following results:.

CBO used ranges of values for several key parameters in its recapitalization model. The capital requirement for the GSEs ranged from 3 percent to 6 percent of their assets unadjusted for risk , in 0.

In those years, the GSEs build capital by keeping all of their annual earnings. During the first stage—starting just after recapitalization and lasting for five years—annual growth ranges between zero and 8 percent in the model, representing the potential for extraordinary volatility of earnings around the period of recapitalization. After that, in the second stage, earnings growth settles to a steady rate of 3 percent a year. With capital requirements set as a percentage of assets, the growth of assets raises the dollar amount of capital required.

That debt is assumed to cost the GSEs an after-tax rate of 3 percent per year, an estimate of long-term borrowing costs during recapitalization. Junior preferred shareholders are in line to receive the dividends associated with their shares before holders of new or existing common shares.

That refusal would reduce the value of the new common shares, making recapitalization more difficult. However, those alternatives would not have a large effect on the results of this analysis, CBO estimates. If FHFA put the GSEs in receivership, it might be able to transfer some of their assets and liabilities to a new corporation to which no existing shareholders had a claim. The new corporation could then sell common stock and use the proceeds to capitalize itself and to reimburse shareholders in the old GSEs according to the priority of their claims.

That priority order would require senior preferred stock to be redeemed before any junior preferred or common stock. If, however, the Treasury wanted to raise capital through the sale of new common shares without resorting to receivership for the GSEs, the claims of junior preferred shareholders would have to be addressed. Regulator scraps pandemic-related fee on mortgage refinances Jul. An inflation storm is coming for the U. Mortgage rates slide to lowest levels since winter — investors grow skeptical of economic recovery Jul.

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Cl C Chrome Safari Firefox Edge. DJIA F. Crude Oil. The U. Initially, the U. Treasury injected capital into Fannie and Freddie via preferred stock, which would reward the U. Treasury for its investment with a regular fixed dividend.

That all changed in August , when the terms of the investment were amended. Rather than pay a fixed rate of return on the U. Treasury's preferred stock, Fannie and Freddie would be required to pay dividends based on their net worth.

In effect, the new "net worth sweep" sent all the profits of Fannie and Freddie to the U. The mortgage insurance business is very much a "feast or famine" industry: Long periods of profits are earned when housing prices rise in a slow and steady pace, followed by massive losses when housing prices fall.

Right now, it's more feast than famine, and the U. Treasury is taking all the profits out of Fannie and Freddie. However, it's quite likely that at some point the fortunes of the industry, and the flow of money, will have to reverse, at which point the Treasury will have to send cash back to Fannie and Freddie to cover any losses. The senators characterize the future reversal of cash flows as a risk to taxpayers.