Despite being delinquent on filing its annual financial statement with the Securities & Exchange Commission for almost a year, government-chartered mortgage backer Fannie Mae (NYSE:FNM) reported that it will not be delisted from the New York Stock Exchange -- at least, not yet. In the immortal words of Mel Brooks, "It's good to be the king."
Fannie Mae is the undisputed ruler of all mortgage finance companies. Fannie and its smaller contender Freddie Mac (NYSE:FRE) either own or guarantee repayment for virtually half of the $7.6 trillion mortgages issued in the country. After entering into agreements with banks and lenders to buy or guarantee the loans, they then bundle them into securities -- a process called "securitization," appropriately enough. Those securities are then resold to investors, essentially funding Fannie and Freddie's operations with their own debt.
Fannie and Freddie are too big to fail; the repercussions on the housing market would be severe, perhaps taking down a number of financial institutions as well. That might very well create a spiral effect on the rest of the economy. Homeowners have tapped the equity in their homes to spur sales and fuel growth at disparate companies such as Wal-Mart (NYSE:WMT), Home Depot (NYSE:HD), and even Dell (NYSE:DELL). If Fannie or Freddie go under, they might plunge the overall economy into a recession, or worse.
Would that lead to a massive taxpayer-financed bailout of Fannie and Freddie, like the savings and loan industry received in the 1980s? Perhaps not; the mortgages are not backed by the federal government, but Fannie and Freddie's congressional charters would suggest they are entitled to at least some protection. And the regulators will do all that's in their power to prevent such a collapse, including extending extraordinary leeway in submitting Fannie Mae's financial statements.
Last Friday, the SEC approved a rule change submitted by the NYSE -- over the objections of the Nasdaq exchange -- that gives late filers like Fannie Mae a reprieve from being delisted. Previously, companies went on watch if they were more than nine months late from their filing due date. Now the exchange has flexibility in deciding whether companies more than a year late will be delisted. Whether they use those extraordinary powers with anyone other than Fannie Mae remains to be seen.
Earnings restatements at the mortgage guarantor are expected to be as high as $11 billion -- maybe even more. Six different investigations into Fannie's accounting practices are under way, by organizations including the SEC, the Justice Department, the IRS, and Congress, as well as Fannie itself.
Fannie Mae will be subject to quarterly scrutiny as the stock exchange monitors the progress, or lack thereof, being made toward filing. While the government-sponsored enterprise will remain listed, the NYSE will identify it as a late-filer on its website -- an added ".LF" indicator. That's a more opaque method than Nasdaq's, which highlights out-of-compliance companies by appending a letter E to their stock symbols for all investors to see.
While being too big to fail or file is something of a reprieve for Fannie Mae shareholders like me, it does not relieve the sensation that perhaps some of us got in still too early on this troubled giant. Getting its financial house in order forthwith will ensure that the embattled king is not overthrown.
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Fool contributor Rich Duprey owns shares in Fannie Mae and Wal-Mart. He has no financial position in any of the other companies mentioned in this article. Dell is a Motley Fool Stock Advisor pick. The Motley Fool has a disclosure policy.
