The Worst Stocks for 2010: Fannie Mae

What can I say about Fannie Mae (NYSE: FNM  ) , a company so broke that even its uncle wouldn't lend it money? Oh, wait, that's right: Fannie's Uncle Sam is lending her boatloads of your tax dollars, because he's scared of upsetting the mortgage market. The only way to avoid doing that is for the U.S. Treasury to buy mortgages from Fannie and cousin Freddie Mac (NYSE: FRE  ) at rates that Bank of America (NYSE: BAC  ) and Wells Fargo (NYSE: WFC  ) will not tolerate for the risk involved in residential real estate.

So Fannie has to take on mortgages at what I consider to be government-manipulated low rates and then sell them to investors as mortgage-backed securities. And Fannie hasn't come close to paying out on all the losses for its pre-crisis mistakes on mortgage-backed securities guarantees that are still coming home to roost. Current loss reserves total $65 billion, versus non-performing loans of $197 billion. That's a pretty good indication that there will be billions of dollars more in loss-reserve increases in the coming quarters.

Fannie's 2009 third-quarter results illustrate the problem. The company posted an $18.9 billion loss, which followed on a $14.8 billion loss in the second quarter. The net result was a negative $15 billion shareholder equity balance. That's right. The shareholders, other than Uncle Sam, do not own a penny of this company, and this is no accounting magic. To get back to positive shareholder equity, the U.S. Treasury simply increased its preferred equity investment by $15 billion to a total of $60.9 billion.

But Uncle Sam isn't that enamored of Fannie. He's demanding a 10% annual payment on his loan -- that's $6.09 billion in annual payments. Compare this with Fannie's record 2003 total net income of $8 billion, and you see the bind that Fannie is in, even without all those pesky rising loss reserves. Mind you, the interest payments seem astronomically small when compared with the past 12 months' losses of $82 billion. But hey, we like to look forward to the possibility that Fannie will make it out of this mess. And even if it does, it's highly unlikely that current shareholders will be there to benefit.

If that's not enough to scare you off from buying shares, then consider that this company is in conservatorship and is therefore effectively run by the U.S. government. And the U.S. government's motives are not the same as those for equity shareholders like you and me. If it were, then Fannie should be able to charge huge fees for its guarantees on mortgage-backed securities that could conceivably cover the risk and make a tidy profit. After all, Fannie and Freddie are virtually the only game in town, since no one can compete against the U.S. government -- certainly not the likes of Goldman Sachs (NYSE: GS  ) and Morgan Stanley (NYSE: MS  ) . But the government's aim is to maintain the cheap mortgage environment, and to do that, those guarantee fees just can't be allowed to go to an economic level.

Foolish bottom line
Don't be suckered into thinking that Fannie's shares are cheap because they go for a little more than $1 a stub. It doesn't matter if you have 1,000 $1 shares or 10 $100 shares -- you still have $1,000 invested. Fannie is bankrupt, and it's only the U.S. government that's keeping it on life support. Even if the feds don't pull the plug for political reasons, there is not likely to be any sympathy -- or any cash -- for shareholders.

What do you think is the worst stock for 2010? See the rest of our contenders and cast your vote!

Fool contributor Philip Durell doesn't own shares of any company mentioned. The Motley Fool has a disclosure policy.


Read/Post Comments (8) | Recommend This Article (7)

Comments from our Foolish Readers

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  • Report this Comment On January 21, 2010, at 3:46 PM, uqusi wrote:

    why this guy are always against FNM?

    When FNM gets up ,this guy appears to say something bad to make FNM down.

    When FNM get low a little bit, this guy appears as well to say something bad to make FNM get lower more.

    Why this guy hates FNM so much!?

  • Report this Comment On January 21, 2010, at 3:58 PM, timothy2010 wrote:
  • Report this Comment On January 21, 2010, at 4:06 PM, SukiTawdry wrote:

    FNM - low a litttle bit?

  • Report this Comment On January 21, 2010, at 5:58 PM, cdulan wrote:

    FNM is a bet on the government. Unless the government defaults, this stock will retain the current minimal value.

    You are crazy to think it can go lower. What is the next step? Complete nationalization. Put that on budget.

  • Report this Comment On January 22, 2010, at 1:39 PM, TMFHousel wrote:

    "You are crazy to think it can go lower. What is the next step? Complete nationalization"

    Rep. Barney Frank this morning: "This committee will be recommending abolishing Fannie Mae and Freddie Mac in their current form and coming up with a whole new system of housing finance"

    http://www.cnbc.com/id/35012329

  • Report this Comment On January 22, 2010, at 7:30 PM, bullshiite wrote:

    Rep. Barney Frank this morning: "This committee will be recommending abolishing Fannie Mae and Freddie Mac in their current form and coming up with a whole new system of housing finance"

    Don't tell me that elected officials are manipulating stock prices! That would mean they would be making their buddies a lot of money at a cost to shareholders; and that my friends, would be a HAL of a problem. A democracy should not allow this GS to continue.

  • Report this Comment On January 23, 2010, at 4:35 PM, timothy2010 wrote:

    Government offers unlimited financial support for Fanny and Freddie because they are not just ordinary companies, they are the most important private instiutions of the nation. The country's economic boom depends on housing boom because it will stimulate all sectors of the economy through increasing consumer spending, therefore sufficient

    mortgage funds must be available for potential home buyers at all cost. If the economy continue to be in a slump, government's budget deficit will continue to mount, unemploment will hit 25%, there will be great financial suffering for 30 millions of Americans and there will be social and political unrest. In any crisis emerge opportunities, the U.S. Treasury now owns 80% of the common shares of AIG, FNM and FRE and it will incur huge profit from its investment in

    the years to come. As stated in the conditions of Conservatorship, when Fanny and Freddie emerge from the conservatorship back into the status of private company, the government can sell all its common shares for a profit. The government has 20 years to exercise its warrants and take its

    profit, it certainly won't do it now to depress share price with the psychological pressure of share dilution.

    http://fpc.state.gov/documents/organization/110097.pdf

    In a severe recession, many companies are in financial crisis, Fannie and Freddie are of no exceiption but U.S. is emerging from the

    recession and economic recovery has started. The worse is over for Fannie and Freddie and their financial health will get better month after month and this year will be their best year since the crisis

    began. Those who wish for the destruction of Fanny and Freddie are committing suicide and should prepare to lose their jobs and let their

    family starving if the U.S. economy should spiral down to another Economic Great Depression.

  • Report this Comment On January 24, 2010, at 12:27 AM, timothy2010 wrote:

    The only workable alternative solution to GSE:

    .

    If the U.S. government is aware of the significant roll the mortgage securities companies play in the prosperity of the U.S. economy but does not want to assume the high cost of sponsorship in time of serious economic downturn while at the same time desires the stabilization of the housing industry so that a downward spiral into another housing slump will not occur, there is only one alternative.

    .

    First consider these facts:

    .

    -The housing industry is the most important sector in the economy, it is the destiny of the country's economic boom and doom because housing boom will stimulate all sectors of the economy such as financial industry, electric appliances industry, home entertainment industry, automobile industry, home renovation industry and many others.

    .

    -History proved that Nationalization of Fannie and Freddie did not work due to lack of funding and constant incurrence of operating loss, that is why they were Privatized. The re-Nationalization will lead to a viscious cycle of re-Nationalization and re-Privatization.

    .

    -Mortgages held by banks must be freed up and mortgage funds used to acquire mortgages from the banks by mortgage securities companies must come from investors, domestically and globally.

    .

    -Investors' involvement in the mortgage securities companies is essential, the pride of ownership in the companies entice the investors' interest and eagerness in investing in the MBS's of the companies they have shares in. For this reason, the mortgage securities companies must be publicly or privately owned companies with common shares and preferred shares issued.

    .

    -Greed is embedded in human nature, desire for higher corporate profit to enhance shareholder value and for high top executives' bonus, risky sub-prime mortgages, even prime mortgages will likely be offered to financially unsecured home buyers in the expense of the country's financial security. The consequence will be massive default in mortgage payments, especially in time of recession, causing a downward spiral in economic slump. Without any government sponsorship and control in the housing industry, another Economic Great Depression will likely result.

    .

    -Diversification is the key for a safe, stable and successful investment. Instead of putting all the eggs in one basket, spreading the eggs in many baskets can ensure the survival of many eggs.

    .

    CONCLUSION:

    .

    Therefore, instead of abolishing Fannie Mae and Freddie Mac, the government should create more Adams and Eves, either as publicly owned or privately owned companies without sponsorship in them but has the power to intervene as a preferred shareholder, thereby injecting recue funds in them. The expansion in the number of MBS companies will increase investment opportunities for investors, will increase the inflow of MBS investment funds from investors from many channels, most important, will enable U.S. treasury's opportunity to invest in the shares of the "astronomical" number of MBS companies and amid imminent global economic boom of the coming years, cash in its profit and clear the tens of trillions of national debt. At the end, U.S. will be a debt free country and will retain its status of world Super Power, both financially and militarily. But the government needs to erect monitoring agencies stationed at all MBS companies strictly investigating each mortgage application to ensure that only financially secured buyers are granted the mortgages.

    .

    It is the lack of regulation that caused the current sub-prime crisis and future sub-prime crisis. With strict regulation in place and with diversification, future re-occurrence of sub-prime crisis will unlikely to re-occur.

    .

    For the time being, the economy is recovery and will accelerate as Fannie and Freddie continue to acquire the delinquent mortgages and release the "toxic assets" from the banks. Very soon profitable operation will resume. Therefore they should be left alone to conduct their business with full goverment support.

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