Fannie, Freddie Soar on FHFA Action - Analyst Blog

On Tuesday, shares of two government sponsored enterprises (GSEs) – Fannie Mae FNMA and Freddie Mac FMCC jumped 7.78% and 6.90%, respectively. The shares soared following the scrapping of the Federal Housing Finance Agency's plan (FHFA) to reduce the maximum size of residential loans, which the two firms can purchase.

The decision came on the concern that lowering the loan purchase limit would jeopardize the housing market recovery. Also, there is uncertainty surrounding the entrance of other firms to fill in the void.

At present, the general loan purchase limit is $625,500 in the country's high-cost areas (Los Angeles, New York and Washington), while the loan purchase limit for the rest of the country is $417,000 for a single-unit property. Both the limits have been retained.

Previously, in Dec 2013, the FHFA contemplated to lower the loan purchase limit by approximately 4.1%. Hence, the loan limit in the country's high-cost area would have been lowered to $600,000, while for the rest of the nation it would likely be $400,000.

The primary reason for lowering the loan purchase limit was to reduce Fannie Mae and Freddie Mac footprints in the market, thereby limiting taxpayers' exposure to possible losses. Further, FHFA apprehended that this would allow other firms to re-enter the market and purchase high-end loans.

At present, Fannie Mae and Freddie Mac own or guarantee nearly 60% of all the U.S. residential loans. These loans are then packaged into securities and sold to investors. Hence, any change in the loan purchase limit would have a significant impact on the overall housing sector.

Notably, later this week, the Senate Banking Committee will mull over a bill to shutdown Fannie Mae and Freddie Mac, which are to be replaced with an industry-financed government mortgage reinsurer. However, owing to skepticism over such a legislation becoming a law, the regulator will remain the controller in the near term.

Currently, Fannie Mae carries a Zacks Rank #3 (Hold), while Freddie Mac carries a Zacks Rank #5 (Strong Sell). Some better-ranked finance stocks include Home Loan Servicing Solutions, Ltd. HLSS and Affiliated Managers Group Inc. AMG. Both of these have a Zacks Rank #1 (Strong Buy).