BNL Finance has covered Fannie Mae (OTCMKTS:FNMA), Freddie Mac (OTCMKTS:FMCC), and the prospects of GSE reform quite closely over the last few months. It is no secret that I hold a small position in FNMA stock that was purchased for the BNL Portfolio under $2/share. I have went on the record saying even with 100% gains in both FNMA and FMCC stock, there is no reason to sell. Here is why it is a good idea to maintain those positions headed into 2017.
First, it is a new era with Donald Trump as President and his Treasury secretary pick, Steven Mnuchin, both seeking GSE reform. Mnuchin previously said that dealing with Fannie Mae and Freddie Mac is a top 10 priority of the new administration.
Second, Mnuchin has leverage over conservative Republicans who want to keep their cash cow alive, or kill it altogether. House Financial Services Committee Chairman Jeb Hensarling (R., Texas), and Sen. Mike Crapo (R., Idaho) are two of many Republicans who have argued to wind Fannie Mae and Freddie Mac down entirely. In a $14 trillion mortgage market where Fannie Mae, Freddie Mac, and Ginnie Mae account for about all owned or guaranteed mortgages, such a solution makes no sense.
Third, Mnuchin and Trump’s plan is only natural. Yes, the government spent $187 billion to bail out Fannie Mae and Freddie Mac, but with a dividend paid in December, the companies have now paid the Treasury more than $255 billion! It was a positive investment for the government, but just like their bailout of General Motors Company (NYSE:GM), the plan must be to exit the investment.
How to invest in FNMA stock or FMCC stock?
With all things considered, there are many reasons to be bullish headed into 2017. However, it is important for FNMA stock or FMCC stock owners to realize the Treasury Department has warrants that give them rights to a 79.9% ownership stake in Federal National Mortgage Association (Fannie Mae) and Federal Home Loan Mortgage Corporation (Freddie Mac). FNMA stock and FMCC stock are nothing more than speculative bets on GSE reform, recapitalization, and a clean release from government conservatorship.
My belief is that Mnuchin and Trump will together end the Treasury’s reign over the mortgage industry, and that a private market solution to build a capital cushion for Fannie and Freddie will be reality. In other words, my belief is that investors like you and me will end up paying to recapitalize Fannie and Freddie as part of GSE reform. After all, there is no way in hell the government gives back money or lets Fannie and Freddie retain their earnings to create capital before ending government conservatorship.
Still, 2017 looks like a year, more so than any other, where real progress will be made for Fannie Mae and Freddie Mac. If that progress points in the direction of GSE reform, then FNMA stock and FMCC stock should continue to trade higher throughout the year (as speculative bets on reform).
However, investors must consider that 2017, like all years post recession, will be volatile as Fannie Mae and Freddie Mac stock respond to every headline. That’s why we reiterate our previous take ahead of 2017: It’s not wise to own a massive stake in Fannie Mae and Freddie Mac, but selling FNMA stock or FMCC stock ahead of what will likely be the most productive year post-financial crisis is a horrible idea.
After all, if privatized, FNMA stock and FMCC stock could very well be $30/share. If you currently own, why sell now?