Why Fannie Mae and Freddie Mac Shares Plunged Today

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: After months of continued gains, shares of Fannie Mae (FNMA 1.03%) fell by an astonishing 40% and Freddie Mac (FMCC 1.10%) was not far behind dropping 30%, as a result of the announcement of the bi-partisan bill posed by the Senate Banking Committee to begin winding downing the two government sponsored entities. At the time of writing each stock was down approximately 30%.

So What: While the final text of the legislation was not announced, a release from the committee noted Chairman Tim Johnson (D-SD) and Ranking Member Mike Crapo (R-ID) have reached a plan which will ultimately wind down and eliminate Fannie and Freddie while creating the Federal Mortgage Insurance Corporation (FMIC), which models the Federal Deposit Insurance Corporation (FDIC) used to protect bank deposits.What: After months of continued gains, shares of Fannie Mae (FNMA 1.03%) fell by an astonishing 40% and Freddie Mac (FMCC 1.10%) was not far behind dropping 30%, as a result of the announcement of the bi-partisan bill posed by the Senate Banking Committee to begin winding downing the two government sponsored entities. At the time of writing each stock was down approximately 30%.

The reform is aimed to protect taxpayers by ensuring the new entity receives 10% private capital up front, and in turn creates an insurance fund for mortgages. In total it would be funded through fees charged on mortgages, much like the FDIC requires payment from banks for total deposits.

Its aim would be to ensure the mortgage market is stable and liquid, while also safeguarding that a 30-year fixed rate mortgage remains affordable to all Americans. As with much of the discussion from politicians surrounding Fannie and Freddie, the provisions for current shareholders was not mentioned directly.

Mike Crapo noted in the announcement, "This agreement moves us closer to ending the five-year status quo and beginning the wind down of Fannie and Freddie while protecting taxpayers with strong private capital, building the components for a stable secondary market and avoiding repeating the mistakes of the past."

Now What: Many investors, including billionaires Bill Ackman and Bruce Berkowitz, have campaigned either verbally or through lawsuits that the functions of Fannie Mae and Freddie Mac should ultimately be transferred to privately held enterprises with the same function.

Today's announcement from the Senate Banking Committee instead proposes an insurance fund is created under the belief "the status quo in which Fannie Mae and Freddie Mac remain in conservatorship is not a viable option for our nation's housing finance system."

As with any legislation, the proposed bill will have to be passed by lawmakers in both the House and Senate, so it is likely years away from its final approval. However with multiple bi-partisan efforts and the support of President Obama, many believed today's announcement could spell the end of Fannie and Freddie as currently constructed.