Fannie Mae And Freddie Mac: Everything You Need To Know
Federal National Mortgage Assctn Fnne Me (OTC: FNMA) and Federal Home Loan Mortgage Corp (OTC: FMCC) shares are bouncing off of their session lows on Monday but remain down about 7 percent following a huge surge last week.
The stocks spiked more than 50 percent following comments from Donald Trump’s new Treasury Secretary appointee Steven Mnuchin.
"We will make sure that when they are restructured, they are absolutely safe and don’t get taken over again,” Mnuchin said of Fannie and Freddie. “But we’ve got to get them out of government control.”
Here’s an overview of Benzinga’s coverage of the developing story of Fannie Mae and Freddie Mac.
What Fannie And Freddie Do
Fannie and Freddie, were placed under conservatorship when they required taxpayer bailouts during the 2008 financial crisis. Since 2012, every cent of their profits have gone to the U.S. government.
The two companies are classified as government sponsored enterprises (GSE). These entities typically are typically privately-held companies, but their guarantees are backed implicitly by the U.S. government. The government creates GSE’s such as Fannie Mae, Freddie Mac, Federal Home Loan Bank and Federal Farm Credit Bank to help reduce the cost of capital in certain critical markets.
GSE student lender SML Corp (NYSE: SLM) opted to go completely private and cut all ties with the U.S. government back in 1997. While the stock skyrocketed more than 244 percent in its first decade as a totally private entity, it was slammed by the Financial Crisis and has sold off by more than 36 percent in the last decade.
Last week’s rally pushed Fannie and Freddie toward the all-important $5/share level. The $5 level is important for both institutional investors and traders. Many funds consider stocks that trade below $5/share to be “penny stocks,” which are not eligible for investment. Traders take advantage of this restriction by selling shares of stock that dip below $5 and buying shares that rise above it to ride the momentum of institutional buying and selling.
For traders that want to speculate on Fannie and Freddie but want slightly sell risk exposure, preferred shares such as FED HOME LOAN MTG 5.79% PRF PERP USD50 (OTC: FMCCK) and FED NATL MORT ASSC 7.625% PRF NON-CUM SER’R’ (OTC: FNMAJ) could be a better option that common shares. Preferred shares are higher on the priority list when it comes to claims on liquidation proceeds, and they have fixed liquidation values that protect them from dilution risk.
Preferred shares aren’t as much of a lottery ticket trade as common shares are at this point. With the "net-worth sweep" intact, Fannie and Freddie common shares are completely worthless. These shares have significant upside under the right circumstances, but it will require favorable court decisions in shareholder lawsuits and/or favorable treatment by the Trump administration to realize this potential. At this point, common shares are extremely risky bets.
The Risky Bet
Several high-profile investors are taking that risky bet, including Pershing Square Capital’s Bill Ackman. In a Columbia University video, Ackman explains that there is no practical way to liquidate Fannie and Freddie.
“I believe there is no alternative for Fannie and Freddie, other than an explicitly government-guaranteed housing financial system, which would add about $6 trillion dollars's worth of debt to the budget,” Ackman says in the video.
Finally, from a technical analysis standpoint, both Fannie and Freddie’s stocks just broke out of a four-year flag technical pattern. The flag pattern breakout is typically a very bullish indication and suggests that traders could see significant additional upward momentum pending additional news out of Washington D.C.
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