Fannie, Freddie's redesign could be a boon for preferred stocks, analyst says

Bloomberg

Height Analytics Friday began hedging shares of Freddie Mac and Fannie Mae, citing expectations of "several positive events over the next six months" that will address the thorny issue of ownership and control of the two credit giants immovable.

Freddie

HSFC -2.96%

and Fannie

FNMA, -2.36%

were swept away by the federal government when the housing finance system melted in 2008 and have remained in limbo ever since. But the stars can finally be aligned for their release. A business-friendly white house has just installed a new regulator, who is a small government fan, to oversee the two companies by working with a treasury secretary with professional experience in housing finance.

The new regulator, Mark Calabria, was sworn in as head of the Federal Housing Finance Agency in April and began working with the Treasury to chart next steps for Fannie and Freddie. Among these: the Treasury should soon submit to the White House a plan for both companies. Size analyst Ed Groshans predicts that this will happen by the end of July and that both companies are starting to retain their capital, instead of returning it to the Treasury quarterly shortly thereafter.

Related: Fannie Mae turns to taxpayers after $ 6.5 billion loss

As part of the Trusteeship Agreement entered into in 2008, Treasury holds approximately 80% of the preferred shares of Fannie and Freddie. Groshans wrote that he expected the Treasury "to believe that its first preferred shares would be repaid".

After that, he said, he expects Freddie to raise $ 52 billion in new shares and is considering converting second preferred stock holders into common shares of the company. A value equal to 75% of the par or more, thus increasing the value over 45% of the junior preferred shares. Similarly, he expects Fannie to raise $ 87 billion in new common shares, with a junior-common-share conversion like Freddie, which helps them to earn more than 40%.

Lily: Fannie-Freddie shareholders could be paid after a decade of uncertainty

Since the two companies will issue more shares and convert the status of second preferred shares into common shares, this will "dilute" the value of the outstanding common shares by 30% to 35% or more, Groshans writes. .

For this reason, he begins the hedge by assigning a preferred purchase price to the preferred shares and a common sales rating. The common shares of Freddie and Fannie have already jumped 155% and 166%, respectively, since the beginning of the year, following speculation about the end of the term of conservative.

See: As the Fannie-Freddie reform begins, here are the three big issues of the housing market