Why Shares of Fannie Mae and Freddie Mac Are Almost 30% Higher in 2014

Source: Wikimedia Commons: Fannie Mae headquarters

So, what's it gonna be: Are Fannie Mae (NASDAQOTCBB: FNMA  ) and Freddie Mac (NASDAQOTCBB: FMCC  ) on the brink of being wound down or are they going to continue to be valid pillars of the U.S. mortgage finance system?

According to shareholders, Fannie Mae and Freddie Mac will stay around and continue to provide credit and liquidity to the U.S. housing market. This can easily be seen by the whopping increase in Fannie Mae's and Freddie Mac's common share price over the last year.

Fannie Mae's common shares have returned 139% and Freddie Mac's common shares 145% over the last twelve months as investors bet that the two government-sponsored entities will be returned to shareholders. In 2014, both common stocks are still up approximately 30%.

What's the fuss all about?
Ever since the federal government stepped in during the U.S. real estate crisis and recapitalized the two companies in order to prevent a collapse of the U.S. mortgage finance system, investors hoped that Fannie Mae and Freddie Mac would be released from the grip of the Federal Housing Finance Agency.

After receiving $187 billion worth of bailout funds, the two GSEs have been placed into conservatorship of the FHFA and were required to fork over all future profits as part of a 'net sweep agreement'. The money now goes right into the coffers of the U.S. Treasury while payments are considered dividends and are not applied against the bailout balance.

Investors have been betting on two things
Investors pretty much have been betting on two things in 2013 and 2014:

1. Fannie Mae and Freddie Mac will not be wound down as suggested by the Johnson-Crapo reform bill. The bill ultimately failed to attract enough votes and appears to be pretty much dead in the U.S. Senate.

2. Fannie Mae and Freddie Mac will indeed be returned to shareholders which means the common stock will not be worthless.

Since shareholders were starting to sue the government in order to have the net sweep agreement overturned, more and more investors piled into the common stock of the two GSEs and pushing up their prices over the last six months.

Bruce Berkowitz of Fairholme Funds, Bill Ackman of Pershing Square Capital Management and, most recently, activist investor Carl Icahn have all established positions in Fannie Mae's and Freddie Mac's preferred and common stock whereas the trend has been to invest in the common stock.

Add to that, the two GSEs have now repaid more than $200 billion to the government, an amount exceeding the bailout funds which further gives credibility to the argument, that Fannie Mae and Freddie Mac should be set free.

Looking ahead
Though Fannie Mae and Freddie Mac have made some progress over the last couple of years in regaining their profitability, their fate remains uncertain.

Unfortunately, it looks as if investors will have to wait a while until they get some clarity with respect to the future of Fannie Mae and Freddie Mac as their fate will most likely only be determined in court. Given the complexity of the issue, this is a fight that could drag on for years.

Top dividend stocks for the next decade (Hint: It's not Fannie or Freddie)
The smartest investors know that dividend stocks simply crush their non-dividend paying counterparts over the long term. That’s beyond dispute. They also know that a well-constructed dividend portfolio creates wealth steadily, while still allowing you to sleep like a baby. Knowing how valuable such a portfolio might be, our top analysts put together a report on a group of high-yielding stocks that should be in any income investor’s portfolio. To see our free report on these stocks, just click here now.


Read/Post Comments (1) | Recommend This Article (8)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 3010385, ~/Articles/ArticleHandler.aspx, 8/20/2014 12:31:39 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement