What happened
Shares of mortgage finance giants Fannie Mae (FNMA 0.51%) and Freddie Mac (FMCC 0.93%) are dropping again today, down by 11% and 9%, respectively, as of 11 a.m. EST.
This comes on the heels of considerable declines last week, caused by reports that the Senate finally intends to deal with reforming the mortgage system in 2018.
Image source: Getty Images.
So what
There is a mortgage reform bill in the works in the Senate. Since it is a bipartisan effort, there is presumably a good chance that it could gain serious traction.
While we don't know the details of the bill just yet, The Wall Street Journal reports that the proposal would allow investors to create competitors to the two agencies, and would release Fannie and Freddie from government control. These agencies (existing and newly created) would then buy mortgages from lenders and securitize them. The proposal calls for losses to be taken by private investors if underlying mortgages default, as well as by the agencies themselves. And if the losses incurred became greater than the companies' capital cushions, they could even be allowed to fail.
The idea seems to be that if there are more than just two major players in the mortgage finance industry, no single company (even Fannie and Freddie) would be "too big to fail."
Some questions still need to be answered, such as what would happen to mortgage-backed securities that have already been issued by Fannie and Freddie. Would they still have their government guarantees, for instance?
Now what
To be clear, we have no idea at this point what would happen to common and preferred shareholders of Fannie and Freddie, and this uncertainty is a big reason for the stock's decline. According to earlier reports, the proposal would pay preferred shareholders an amount close to full value for their shares, while common shareholders would get much less, if anything.
