KBW analysts believe it will take 15 years for the two government-sponsored enterprises to meet FHFA’s capital requirement to exit conservatorship. KBW reduced its target price on Fannie and Freddie stocks to $1.00 each.
Spikes in amortization income, guarantee-fee income and credit-related expenses are all closely tied to the government’s intervention in the coronavirus crisis. (Includes data chart.)
Fannie and Freddie reported a combined profit of $6.69 billion in the third quarter, a 54.8% sequential increase. However, year-to-date profits were down more than 19% due to COVID and CECL implementation. (Includes data chart.)
Models using the most likely assumptions about retained earnings, capital requirements and expected returns suggest the GSEs would have unsuccessful public offerings.
The improved financial performance of the GSEs largely reflects the impact of CECL. The provisions for losses that would have been made in 2Q20 under the old accounting standard were already accounted for by CECL, which was adopted in December. (Includes data chart.)
Most of the concerns about the new regulation hinge on how much profit the GSEs can make under the bumped-up capital levels. Most industry observers appear to be on the side of “not enough.”