The GSEs' continue to show healthy underlying trends in their core guarantee business, which have been obscured by non-cash, accounting-based derivative losses in the GSEs' non-core investment portfolio. Changes in the value of the derivatives create enormous volatility in the GSEs' GAAP quarterly earnings, even though they do not have an impact on economic earnings or intrinsic value. Because the net worth sweep does not allow the GSEs to retain capital, it is likely that future accounting -based derivative losses could cause the GSEs to borrow additional funds from Treasury despite having no economic need to do so. This is yet another example of why the Net Worth Sweep is problematic.
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- TMHC 15-Year Financial Data
- The intrinsic value of TMHC
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- KIN 15-Year Financial Data
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Since our last call, there has been a growing belief among highly regarded and politically influential groups and thought leaders that the GSEs must retain capital and exit conservatorship. Substantial questions have been raised about the government's legal justification for the Net Worth Sweep. We encourage you to read Gretchen Morgenson's December 13th New York Times article on the GSEs entitled: "Fannie and Freddie's Government Rescue Has Come With Claws," which can be found here: http://www.nytimes.com/2015/12/13/business/fannie-and-freddies-government-rescue-has-come-with-claws.html?ref=todayspaper&_r=0.
Recently, the Community Home Lenders Association and Community Mortgage Lenders of America, two organizations representing the politically powerful community banks, wrote a letter to the White House arguing for capital retention and an end to conservatorship for the GSEs. There have also been reports that the White House is considering various alternatives for recapitalizing the GSEs. Although government officials have denied these reports, we find it interesting that these reports have surfaced amid a growing consensus that a recapitalization of the GSEs is needed.
At the end of October, a shareholder of both Fannie and Freddie's common stock filed suit against the Net Worth Sweep in Kentucky. This case provides another avenue for pressing the case against the Net Worth Sweep in addition to the cases in the DC District Court of Appeals and the Federal Court of Claims.
The GSEs underlying guarantee business is in healthy shape, the momentum for capital retention and an exit for conservatorship are growing, and the legal avenues for fighting the Net Worth Sweep have increased.
From Bill Ackman ( Trades , Portfolio)'s Pershing Square Holdings third quarter 2015 letter to shareholders.About GuruFocus: GuruFocus.com tracks the stocks picks and portfolio holdings of the world's best investors. This value investing site offers stock screeners and valuation tools. And publishes daily articles tracking the latest moves of the world's best investors. GuruFocus also provides promising stock ideas in 3 monthly newsletters sent to Premium Members .
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