Fannie Mae and Freddie Mac: On Sale For a Limited Time

A market overreaction to legislation unlikely to pass creates a near term buying opportunity in these GSEs.

Mar 17, 2014 at 9:00AM

Last Tuesday, investors in Fannie Mae (NASDAQOTCBB:FNMA) and Freddie Mac (NASDAQOTCBB:FMCC) were greeted with an unpleasant surprise. But it wasn't the actual news that was surprising so much as it was the 30%+ drops in the GSEs share prices and how the market reacted. As a holder of GSE shares myself, I view this drop as a buying opportunity and soon after the big move lower, I added to my GSE positions.

Death of the GSEs?
Fannie and Freddie have been great targets for politicians from across the political spectrum since the mortgage meltdown in 2008. But while almost all politicians want to end Fannie and Freddie, like so many other things in Congress, they can't agree on how to do it. So political compromise seems to be the worst possible thing for GSE investors but in this Congress, it has not been a present threat so far.

Investors were startled Tuesday when Senate banking committee members Chairman Tim Johnson (D-South Dakota) and ranking member Mike Crapo (R-Idaho) crafted and put forth a proposal to wind down Fannie and Freddie.

But what are the chances of this proposal going anywhere in the near term? Based on the negligible progress of the Corker-Warner bill (the proposal that formed the basis for the Johnson-Crapo proposal) the Johnson-Crapo proposal has a long uphill battle against it. Despite support from President Obama, and the Corker-Warner bill being a compromise worked out between a Republican and a Democrat, the bill has not even passed the Senate.

Johnson-Crapo comes at an even worse time for chances of passage than the Corker-Warner bill. With only eight months until mid-term elections, much of Congress' efforts over the next several months will be directed to serving their constituents through constant campaigning rather than getting major legislation passed.

And even if the Senate can come together and pass the Johnson-Crapo proposal, it would still need to pass the House to be implemented. Being under Republican-control, the House is looking to remove the government from the housing market as much as possible; a goal that clashes with Johnson-Crapo's plan to create a new federal entity to fill some of Fannie and Freddie's duties.

Investment opportunity
Since returns for Fannie and Freddie investors are almost certain to come from the courts rather than Congress, political gridlock, upcoming elections, and other delays are friends of the GSE investor. Considering past examples, future obstacles, and less than optimal timing, the threat from the Johnson-Crapo proposal seems greatly overblown and unlikely to cut down on the time GSE investors have to fight their battles in court.

Market reaction to the Johnson-Crapo agreement was highly unusual. With most negative news, a company's stock plunges immediately as day traders, market watchers, and automated computer trading systems all put in their sell orders. But with Fannie and Freddie, the news took hours to take its big drop; enough time for the armchair investor to see the headline, grab a coffee, and read several news articles about the proposal.

After bottoming out in the low $3 range, shares of the GSEs have been on the rebound gaining for the final two days of the week to close back above $4, even with Thursday and Friday being negative days for the broader market. This movement shows panic selling to be largely over with the shares possibly being driven back up as investors run a more complete analysis on the situation.

Still speculative, but at a better price
At the core, shares of Fannie Mae and Freddie Mac remain a highly speculative bet given their government conservatorship, but looking at the proposal's chances of passing more closely, it's far from a near-term threat.

With the proposal likely to be held in place until at least the mid-term elections, I believe the original thesis for investing in Fannie and Freddie still applies. Furthermore, I see this drop as a chance for new and existing investors to increase their positions if it still fits within their risk profile.

One bank that could shake up the mortgage market
Do you hate your bank? If you're like most Americans, chances are good that you answered yes to that question. While that's not great news for consumers, it certainly creates opportunity for savvy investors. That's because there's a brand-new company that's revolutionizing banking, and is poised to kill the hated traditional brick-and-mortar banking model. And amazingly, despite its rapid growth, this company is still flying under the radar of Wall Street. For the name and details on this company, click here to access our new special free report.

Alexander MacLennan owns common shares of Fannie Mae and Freddie Mac. This article is not an endorsement to buy or sell any security and does not constitute professional investment advice. Always do your own due diligence before buying or selling any security. 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.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

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.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

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. The show is also heard weekly on dozens of 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. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.


Compare Brokers