Is Fannie Mae A Good Stock To Buy
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We have been under conservatorship, with the Federal Housing Finance Agency acting as conservator, since Sept. 6, 2008. We entered into a senior preferred stock purchase agreement with the U.S. Department of the Treasury pursuant to which Treasury has committed to provide funding to us under specified circumstances. More information regarding the conservatorship and our agreement with Treasury is provided in our most recent Form 10-K and may be supplemented by information in any subsequent Form 10-Qs, which are available under \"SEC Filings.\"
Even though Freddie Mac and Fannie Mae are technically shareholder-owned, they have been under government conservatorship since the Great Recession. Many investors who hold stock in the two companies are eagerly waiting for them to emerge from government control so their stock can trade on public exchanges again.
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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.
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.
This stems from the fact that Treasury, as one source of compensation for providing its financial support to the companies via the PSPA, was awarded warrants on the common equity for 79.9% of the shares of each GSE. This means that Treasury, upon the exercise of the warrants when conservatorship ends9, will have 79.9% voting control of the GSEs. In addition, Treasury will then also own over $200 billion of senior preferred shares in the two companies10. There is uncertainty as to how Treasury would deal with the senior preferred equity ownership position (an explanation of which goes beyond the scope of this post) but the only precedent is for Treasury to convert the position to additional common shares, and thus end up actually owning well more than 79.9% of the shares, with the associated stockholder voting power that goes with it.11.
Fannie Mae has operated under the conservatorship of our safety and soundness regulator, the Federal Housing Finance Agency (FHFA), since September 6, 2008. In September 2008, Treasury made a commitment under a senior preferred stock purchase agreement to provide funding to Fannie Mae under certain circumstances.
We continue to demonstrate our commitment to environmental sustainability through ongoing improvements to our green mortgage products. Our sustainable bonds include our Green Bond Business, which leverages the power of capital markets to accelerate the transition to a low-carbon economy and greener housing stock. We began issuing social bonds in January 2021, backed by loans on multifamily properties that preserve or create affordable rental housing.
These 6 additional grades for each stock are a compliment to the overall POWR Rating shown to the left. Investors should first focus their research on stocks with an overall Buy rating of A or B. Then, and only then, use the component grades to drill down to the stocks that meet your unique investing style. In general, the more component grades of A or B the better the odds that the stock should outperform.
Fannie Mae common shares are now up over 400 percent in the past three months, and its most widely traded preferred shares went from less than two dollars per share to over five dollars in the past two months. The stocks, however, are really only worth the trade because the company is under government control and may not operate on its own.
That is why their stocks initially plummeted in value in 2008 and were delisted from the New York Stock Exchange. The shares would only have value if Congress were to take them out of conservatorship and allow them to recapitalize. That, most analysts say, is a very long shot.
Sen. Bob Corker, a Republican from Tennessee who is sponsoring legislation to reform Fannie Mae and Freddie Mac, has been clear that stockholders will get nothing in his plan, despite the recent profitability of the two:
Once the companies have enough capital to cover their \"first loss\" insurance exposure, Treasury should convert its preferred stock into a sufficient percentage of common stock to ensure that taxpayers' investments can be repaid in full. The firms could then be released from government control and Treasury's equity in the restructured entities sold to private investors over time.
Fannie Mae was acquired by the Housing and Home Finance Agency from the Federal Loan Agency as a constituent unit in 1950. In 1954, an amendment known as the Federal National Mortgage Association Charter Act made Fannie Mae into \"mixed-ownership corporation\", meaning that federal government held the preferred stock while private investors held the common stock; in 1968 it converted to a privately held corporation, to remove its activity and debt from the federal budget. In the 1968 change, arising from the Housing and Urban Development Act of 1968, Fannie Mae's predecessor (also called Fannie Mae) was split into the current Fannie Mae and the Government National Mortgage Association (\"Ginnie Mae\").
Fannie stock plunged. Some worried that Fannie lacked capital and might go bankrupt. Others worried about a government seizure. U.S. Treasury Secretary Henry M. Paulson as well as the White House went on the air to defend the financial soundness of Fannie Mae, in a last-ditch effort to prevent a total financial panic. Fannie and Freddie underpinned the whole U.S. mortgage market. As recently as 2008, Fannie Mae and the Federal Home Loan Mortgage Corporation (Freddie Mac) had owned or guaranteed about half of the U.S.'s $12 trillion mortgage market. If they were to collapse, mortgages would be harder to obtain and much more expensive. Fannie and Freddie bonds were owned by everyone from the Chinese government, to money market funds, to the retirement funds of hundreds of millions of people. If they went bankrupt there would be mass upheaval on a global scale.
On September 7, 2008, James Lockhart, director of the Federal Housing Finance Agency (FHFA), announced that Fannie Mae and Freddie Mac were being placed into conservatorship of the FHFA. The action was \"one of the most sweeping government interventions in private financial markets in decades\". Lockhart also dismissed the firms' chief executive officers and boards of directors, and caused the issuance to the Treasury new senior preferred stock and common stock warrants amounting to 79.9% of each GSE. The value of the common stock and preferred stock to pre-conservatorship holders was greatly diminished by the suspension of future dividends on previously outstanding stock, in the effort to maintain the value of company debt and of mortgage-backed securities. FHFA stated that there are no plans to liquidate the company.
On June 16, 2010, Fannie Mae and Freddie Mac announced their stocks would be delisted from the NYSE. The Federal Housing Finance Agency directed the delisting after Fannie's stock traded below $1 a share for over 30 days. Since then the stocks have continued to trade on the Over-the-Counter Bulletin Board.
Shares of two government-sponsored entities got creamed today after the Supreme Court threw out part of a case that might have brought tens of billions of profits back to shareholders. The stock of the Federal National Mortgage Association (OTC: FNMA), or Fannie Mae, fell more than 32% today, while shares of the Federal Home Loan Mortgage Corporation (OTC: FMCC), or Freddie Mac, fell nearly 37%.
During the Great Recession, Fannie and Freddie took on too much exposure to sub-prime mortgages and had very little in capital reserves to cover their exposure. As the losses began to pile up, the government concluded that it would have to step in, to protect the liquidity of the mortgage market. The Treasury Department agreed to provide up to $100 billion each in taxpayer funds for Fannie and Freddie in return for senior preferred stock.
But perhaps another disappointment for shareholders is that the lawsuit now enables the White House to remove FHFA Director Mark Calabria from his post, which it did swiftly following the ruling from the Supreme Court. Calabria had been a proponent of quickly exiting Fannie and Freddie from conservatorship. That likely would have benefited both of their stocks, which haven't touched $5 per share since 2008.
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Even after these companies' stocks fell 90% or more, and the companies themselves warned the stock might be worthless, investors couldn't resist. Some gamblers figured if these nearly dead companies could manage to show a pulse, their stock prices would soar.
That could be true. But recent history has demonstrated just how risky that proposition is. Stocks like Circuit City essentially evaporated as the companies filed for bankruptcy. GM investors found themselves holding a lemon as the stock was delisted and the remnant was renamed Motors Liquidation Co. mtlqq.
Former mortgage firms Freddie Mac and Fannie Mae are a little different. Those companies were taken under conservatorship by the federal government. The new arrangement certainly provides for the survival of Freddie and Fannie. But that's little comfort for investors who have lost big on the stocks. 59ce067264