For the past several years, Fannie Mae (OTC:FNMA) and Freddie Mac's (OTC:FMCC) shareholders have been fighting a legal battle against the U.S. government to try to end the agencies' conservatorship and allow them to recapitalize. While the list of plaintiffs includes several high-profile investors such as Bill Ackman and Bruce Berkowitz, there is a new wave of support for recapitalization from some of the nation's most prominent civil-rights organizations.
Who's joining the fight for Fannie and Freddie?
In late October, three of the largest and most influential civil-rights groups in the U.S. sent a letter to President Obama and several other government officials urging them to reconsider their position on the conservatorship and recapitalization of the two government-sponsored enterprises, or GSEs.
The letter was sent by the National Community Reinvestment Coalition, or NCRC, National Association for the Advancement of Colored People, and the League of United Latin American Citizens.
Why they want the conservatorship to end
Unlike Fannie and Freddie's shareholders, the reasons these organizations are calling for an end to the conservatorship have nothing to do with how the agencies' profits are distributed. Rather, they feel that Fannie and Freddie are crucial to maintaining access to a fair and affordable housing market.
"The affordable housing goals and the products that Fannie Mae and Freddie Mac administer and have developed for underserved markets have and continue to play a critical role in housing finance, affecting affordability and access to credit for low- and moderate-income and minority communities," the letter explained.
The groups say they are in favor of housing finance reform, but that the administration's plan to reform the GSEs through legislation doesn't have much of a chance to succeed in the current political climate.
In a separate statement, NCRC CEO and President John Taylor said that winding down and getting rid of the agencies, as many in Congress are proposing, is not the way to fix the housing market. "They can and should be recapitalized; they can and should be fixed," Taylor said.
In a nutshell, what the groups are saying is that there is no other plan to ensure continuation of a fair and accessible mortgage market for all creditworthy groups that has any chance to succeed in Congress. And until such a plan exists, a well-capitalized Fannie Mae and Freddie Mac are the best option to ensure that happens.
Investors could win big if the agencies recapitalize
The major court case involving Fannie and Freddie is under way, and while there have been some positive developments for shareholders, a favorable ruling is still a long shot. If you haven't been following the case, here's a primer on the Fannie and Freddie saga, as well as some of the more recent developments.
However, if the lawsuit is successful, or if the Obama administration changes its position on the matter, it could mean a big payday for shareholders. How big? Well, Bill Ackman's Pershing Square did a thorough analysis and concluded that if allowed to fully recapitalize, Fannie and Freddie's common shares could be worth between $23 and $47 -- and that includes the 80% stake the government would be entitled to. As of this writing, the low end of this range is about 10 times Fannie and Freddie's stock price.
It's still unlikely that Fannie Mae and Freddie Mac will be released from conservatorship and allowed to recapitalize anytime soon, but the involvement of civil-rights groups like these definitely doesn't hurt.