Fannie Mae's (FNMA 0.69%) president and CEO recently asserted confidence in the sustainability of the agency, as well as that of fellow government-sponsored enterprise Freddie Mac (FMCC 0.73%). While these comments were warmly received by shareholders, another news event has a real opportunity to boost Fannie and Freddie's stock.
Source: www.futureatlas.com via flickr.
President Barack Obama is scheduled to speak about the housing market on Thursday, and what he says (or doesn't say) could move both agencies' shares.
Fannie and Freddie shareholders face a double threat
Over the past couple years, owners of both Fannie and Freddie common and preferred shares have been engaged in a legal battle with the U.S. government over the agencies' profits.
Basically, the investors claim the current arrangement under which the Treasury Department unilaterally decided to take all of Fannie and Freddie's profits for itself is unfair and illegal. They have a point. After all, both agencies have become very profitable and have returned all of the bailout money they received during the financial crisis, and then some.
Investors also claim that the government's demands are preventing the companies from building up proper capital levels, which would allow them to become truly sustainable. Pershing Square's Bill Ackman, who is Fannie and Freddie's largest common shareholder, recently made the case that the agencies could be worth up to $600 billion if they were reformed. This would result in shares being worth between $23 and $47 to the common stockholders (currently, both agencies trade for a little more than $2 per share).
In addition to the legal battle, there are the on-again, off-again efforts in Congress to dismantle the agencies. If this were to happen, it would likely leave common and preferred shareholders with nothing. But this potential bullet could be dodged in the very near future.
What investors hope to hear
Over the past few years, several proposals have been made to wind down Fannie and Freddie, but there is no consensus on how to do it and what should replace the agencies. In Obama's upcoming speech, shareholders will likely be paying the most attention to what he doesn't say.
Specifically, if the president does not discuss any housing-finance reform proposals, it could be seen as the administration abandoning its goal of dismantling Fannie and Freddie, according to one New York investment bank.
The Obama administration has pressed Congress to produce legislation that would unwind Fannie and Freddie, but there has been little traction, and the Republican-controlled Congress doesn't make things any easier on the White House.
If the administration backs off its efforts to get rid of Fannie and Freddie, it eliminates one potentially catastrophic outcome for shareholders.
What could it mean for shareholders?
The abandonment of efforts to eliminate Fannie and Freddie could be a positive catalyst for Fannie and Freddie shares in the short term, but I don't see this making much of a fundamental difference in the companies' values as investments.
Shareholders still face an uphill legal battle, and the case is likely to take years to work its way through the courts. Plus, one judge has already dismissed several shareholders' lawsuits, causing a great deal of uncertainty in regards to the potential for the others to succeed.
To sum it up, although an abandonment of housing-finance reform efforts would likely be a step in the right direction for hopeful shareholders, it doesn't change what an investment in Fannie or Freddie is -- a gamble.
