What happened
Shares of the government-sponsored entities (GSEs) Fannie Mae (FNMA 1.37%) and Freddie Mac (FMCC 1.10%) popped today for no obvious reason. In the final half hour of trading, shares of Fannie traded nearly 26% higher and shares of Freddie traded nearly 28% higher.
So what
Part of why Fannie and Freddie can move a lot is because they are now penny stocks with millions of shares trading hands each day.
But the big reason they draw so much interest is that they have been under government conservatorship since the Great Recession, when they nearly collapsed.
Fannie and Freddie purchase mortgages from lenders in order to provide liquidity so lenders can keep making loans. The two GSEs then package the mortgages into mortgage-backed securities and sell them to investors. Fannie buys mortgages from larger commercial banks, and Freddie buys them from smaller lenders.
Fannie and Freddie took on too much subprime mortgage exposure during the Great Recession and didn't have enough in reserves to cover their losses, which is why the government had to step in. Since 2012, the two GSEs have been handing over their profits to the U.S. Treasury Department under what has been a very controversial arrangement.
The big question is whether Fannie and Freddie will be able to one day exit conservatorship. After all, both make tens of billions in profits each year, so they could be good stocks if they didn't have to give all of their profits away.
In 2019, Fannie and Freddie were allowed to start retaining some of their profits in an attempt to let them build capital. Sandra Thompson, the acting director of the Federal Housing Finance Agency, which oversees them, has spoken about the GSEs leaving conservatorship, but a timeline is still unknown.
Now what
I can't say with any certainty that the GSEs will definitely leave conservatorship or provide any timeline. There are also a lot of legal issues happening in the background that could impact things.
But there is definitely upside if the two can leave conservatorship and retain their profits. I wouldn't bet the farm on these stocks, but I think it's OK to allocate a very small percentage of your portfolio to them given where they currently trade.
