Fannie Mae and Freddie Mac Investors Could Finally Get Some Good News From the Government

By Matthew Frankel | More Articles
January 7, 2015 | Comments (4)

Fannie Mae's (NASDAQOTCBB: FNMA ) president and CEO recently asserted confidence in the sustainability of the agency, as well as that of fellow government-sponsored enterprise Freddie Mac (NASDAQOTCBB: FMCC ) . While these comments were warmly received by shareholders, another news event has a real opportunity to boost Fannie and Freddie's stock.

Source: www.futureatlas.com via flickr.

President Barack Obama is scheduled to speak about the housing market on Thursday, and what he says (or doesn't say) could move both agencies' shares.

Fannie and Freddie shareholders face a double threatOver the past couple years, owners of both Fannie and Freddie common and preferred shares have been engaged in a legal battle with the U.S. government over the agencies' profits.

Basically, the investors claim the current arrangement under which the Treasury Department unilaterally decided to take all of Fannie and Freddie's profits for itself is unfair and illegal. They have a point. After all, both agencies have become very profitable and have returned all of the bailout money they received during the financial crisis, and then some.

Investors also claim that the government's demands are preventing the companies from building up proper capital levels, which would allow them to become truly sustainable. Pershing Square's Bill Ackman, who is Fannie and Freddie's largest common shareholder, recentlymade the case that the agencies could be worth up to $600 billion if they were reformed. This would result in shares being worth between $23 and $47 to the common stockholders (currently, both agencies trade for a little more than $2 per share).

In addition to the legal battle, there are the on-again, off-again efforts in Congress to dismantle the agencies. If this were to happen, it would likely leave common and preferred shareholders with nothing. But this potential bullet could be dodged in the very near future.

What investors hope to hearOver the past few years, several proposals have been made to wind down Fannie and Freddie, but there is no consensus on how to do it and what should replace the agencies. In Obama's upcoming speech, shareholders will likely be paying the most attention to what he doesn't say.

Specifically, if the president does not discuss any housing-finance reform proposals, it could be seen as the administration abandoning its goal of dismantling Fannie and Freddie, according to one New York investment bank.

The Obama administration has pressed Congress to produce legislation that would unwind Fannie and Freddie, but there has been little traction, and the Republican-controlled Congress doesn't make things any easier on the White House.

If the administration backs off its efforts to get rid of Fannie and Freddie, it eliminates one potentially catastrophic outcome for shareholders.

What could it mean for shareholders?The abandonment of efforts to eliminate Fannie and Freddie could be a positive catalyst for Fannie and Freddie shares in the short term, but I don't see this making much of a fundamental difference in the companies' values as investments.

Shareholders still face an uphill legal battle, and the case is likely to take years to work its way through the courts. Plus, one judge has already dismissed several shareholders' lawsuits, causing a great deal of uncertainty in regards to the potential for the others to succeed.

To sum it up, although an abandonment of housing-finance reform efforts would likely be a step in the right direction for hopeful shareholders, it doesn't change what an investment in Fannie or Freddie is -- a gamble.

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Report this CommentOn January 07, 2015, at 12:20 PM, gabe4justice wrote:

When will the hoodwinked homeowners finally get some good news from the good ole boys , Fannie and Freddie? You know the ones who had their homes taken from them through fraudulent, criminal means? You know, those means being forgery. Which I do believe is a felony almost everywhere. When will the felons go to jail? When will the corrupt feel some kind of remorse? When will the poor people who were lied to from the start get their rightful homes back? When will they hear some good news?
Report this CommentOn January 07, 2015, at 9:24 PM, Riskdiligence wrote:

Gabe4justice, do you mean the same homeowner who could not afford his home? You know, the ones who were "approved" for homes they did not have a sufficient income to obtain. Which I do believe is ignorance. When will the naive be held accountable. I especially like the contradicting statement " when will the poor people who were lied to get their rightful homes back?" If they cannot afford ire home.... How is it rightfully there's. After all the underlying problem with ghe mortgage crisis was lax lending standards and ignorance of people overextending beyond there means.
Report this CommentOn January 07, 2015, at 10:29 PM, maestrolindo wrote:

You should direct your anger at the orange guy from Countrywide and other private banks that 'preyed' on homeowners if you want to call it that. Read about the 40 billion a month in toxic mortgage securities FNMA and FMCC were forced to purchase in the wake of the housing crisis to bail out those banks. It is time to stop horsing around with publicly traded American companies. End the sweep and end conservatorship.
Report this CommentOn January 09, 2015, at 3:06 PM, gabe4justice wrote:

Riskdiligence-you my friend speak like a moron. What about the loans that were fraudulent from the start? What about the banks who submitted different loan apps than what was given to the borrower at closing? ANd many homeowners still don't know that happened. Some just happened to have been sent the documents in error many years later. What about that my friend. And by poor, I wasn't referring to "money", which I know is most likely your god. No matter what happened to the homeowner, whether it be an unforeseen health problem or loss of a job, which caused one to have fallen behind. Many homeowers were lied to about modifications. The banksters made deals with the district attorneys after their robosigning fraud and promised to modify the loans. Instead , they were sold off to other entitites such as green tree( ever hear of the green tree python--pretty fitting name to say the least) who weren't included in the deal and had all intentions to foreclose. Pretty sly of good ole Banksters of America. Modification "trials" were farces. People were given trials , they made those payments, and the banks came back with larger monthly payments. Not sure how that is a modification. And whatever you say, it doesn't matter, because there is no reason to FORGE an owner's signature. Is there Riskdiligence. Forgery is a felony and the felons should be behind bars, period. I'm sure you are probably one of the ones who is in deep in the corruption . If you are, know that true and REAL justice comes in the hereafter. That you can take to your almighty bank and bank on it. :)

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