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.

Easier money than Fannie or Freddie: The 1 stock you must own in 2014
There's a huge difference between a good stock and a stock that can make you rich. The Motley Fool's chief investment officer has selected his No. 1 stock for 2014, and it's one of those stocks that could make you rich. You can find out which stock it is in the special free report "The Motley Fool's Top Stock for 2014." Just click here to access the report and find out the name of this under-the-radar company.

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.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.

Compare Brokers