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Why Shares of Fannie Mae and Freddie Mac Are Up This Week

By Bram Berkowitz - Jul 1, 2021 at 5:36PM

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After falling more than 30% at one point last week, shares of the government-sponsored entities rebounded.

What happened

Shares of the government-sponsored entities rose this week after the Supreme Court made rulings that impacted both organizations.

The stock of the Federal National Mortgage Association (FNMA 0.33%), or Fannie Mae, rose more than 15% after market close Thursday, while shares of the Federal Home Loan Mortgage Corporation (FMCC 4.13%), or Freddie Mac, had risen nearly 9%. 

So what

Fannie and Freddie, which create liquidity in the mortgage market by buying and packaging mortgages into mortgage-backed securities, have been under government conservatorship since the Great Recession after taking on too much exposure to sub-prime mortgages. In that arrangement, the U.S. Treasury provided $100 billion each to Fannie and Freddie in exchange for senior preferred stock and other financial arrangements. 

In a major case that has been ongoing for years, the Supreme Court dealt a major blow to shareholders last week, who were seeking to recoup somewhere in the neighborhood of $124 billion that they claim Fannie and Freddie overpaid to the U.S. Treasury.

Squiggly line depicting share price moving upward on chart.

Image source: Getty Images.

Shareholders asserted the Federal Housing Finance Agency (FHFA), Fannie and Freddie's conservator that previously arranged for Fannie and Freddie to hand over essentially all of their profits to the Treasury, exceeded its statutory authority by doing so. The Supreme Court dismissed this claim, making it unlikely that shareholders will recoup the money. The Supreme Court, however, did make a ruling on part of the case that gave the executive branch more authority over the FHFA. As a result, President Joe Biden immediately replaced former FHFA Director Mark Calabria.

In a separate case this week, a Supreme Court decision extended a moratorium on housing evictions and foreclosures through July.

Now what

Following the Supreme Court case last week regarding shareholders, Fannie Mae stock plunged 32%, while shares of Freddie Mac fell 37%. The ruling not only makes it very unlikely that shareholders will recoup the $124 billion, but it also slows the process, or even the likelihood, of Fannie or Freddie leaving conservatorship.

Shareholders desperately want this because being under conservatorship prevents Fannie and Freddie from issuing dividends or raising private capital. Calabria had been a big proponent of exiting Fannie and Freddie from government control.

I am guessing that the rebound in share prices this week can be attributed to investors who still think an exit from conservatorship is possible. While the path has now gotten considerably harder and potentially way longer, it doesn't mean it's impossible, so the opportunity to buy stock with shares more than 30% down likely presented an opportunity.

Bram Berkowitz has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Federal National Mortgage Association Stock Quote
Federal National Mortgage Association
FNMA
$0.61 (0.33%) $0.00
Federal Home Loan Mortgage Corporation Stock Quote
Federal Home Loan Mortgage Corporation
FMCC
$0.60 (4.13%) $0.02

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