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Fannie Mae and Freddie Mac Aren't Easy Money

Alex Dumortier, CFA
March 12, 2014

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