Fannie Mae and Freddie Mac Aren't Easy Money

A big drop in Fannie Mae and Freddie Mac's shares don't mean it's time to jump in.

Mar 12, 2014 at 10:15AM

The S&P 500 and the narrower Dow Jones Industrial Average (DJINDICES:^DJI) are down 0.36% and 0.27%, respectively, at 10:15 a.m. EDT. Shares of Federal National Mortgage Association (NASDAQOTCBB:FNMA) and Federal Home Loan Mortgage Corp. (NASDAQOTCBB:FMCC), better known as Fannie Mae and Freddie Mac, have popped up on bargain hunters' stock screens after yesterday's savage declines of 27% and 31%, respectively. Whether they constitute genuine bargains is another, altogether more complicated, question -- one I'd advise investors immediately assign to the "too hard" pile.

The catalyst for the stocks' declines was the announcement by the heads of the Senate banking committee regarding a bipartisan plan to wind down the two mortgage giants. The catch? As the Financial Times noted, the plan "did not appear to provide an outlet for investors to share in their profits." Yikes!

Following a reversal in their fortunes in the post-crisis era, those profits are now substantial -- as one might expect for companies that operate a government-sanctioned oligopoly in the housing finance market. Between the lure of those profits and the huge volatility in the shares, which created a self-reinforcing momentum effect, both stocks have attracted enormous interest from hedge funds and other speculators:

FNMA Chart

FNMA data by YCharts.

You're not reading those percentage returns incorrectly: Both stocks have seen nearly 14-fold increases in share price over the past 12 months!

Even as the latest plan emerged from Congress, it shouldn't come as a complete surprise to investors if they are treated as second-class citizens, as there is a precedent for such behavior. Fannie Mae and Freddie Mac have been wards of the federal government since they received a $188 billion taxpayer-funded bailout in 2008. However, under revised terms of the bailout set by the Treasury Department, which became effective last year, Fannie and Freddie cannot retain any of their earnings; instead, they must pay all profits to the government. Prior to that, the government only received a 10% dividend payment on its preferred shares.

The new terms are being contested in court by several high-profile investment funds, including Perry Capital and Fairholme Capital Management. That fact alone ought to instruct individual investors that this is not the playground they want to be playing in. Between the complexity of Fannie Mae and Freddie Mac's financials and, more importantly, the legal and regulatory uncertainty that surrounds their fate, this is a special situation that requires expertise and a lot of attention. If you wish to try to ride the professionals' coattails purely as a punt, that's your business; however, it's not investing and there are easier ways to earn a return in the stock market.

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Alex Dumortier, CFA has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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