Why Fannie Mae (FNMA) Stock & Freddie Mac (FMCC) Stock Are Worth Buying After 35% Collapse

- February 21, 2017

BNL Finance has published its outlook for Federal National Mortgage Association (Fannie Mae) (OTCMKTS:FNMA) and Federal Home Loan Mortgage Corporation (Freddie Mac) (OTCMKTS:FMCC), along with several exclusive reports on FMCC stock and FNMA stock. Therefore, I am not using this article to go through all the details of the court decision, thereby reliving the fact that essentially all of Fannie Mae and Freddie Mac’s claims were rejected in court. The bottom line is that net sweeps that drain Fannie Mae and Freddie Mac of all their capital and net earnings — and FNMA stock and FMCC stock of all their value — aren’t going anywhere right now.

What’s most important to understand is that FNMA stock and FMCC stock owners were hoping the courts would stop the Treasury from essentially robbing Fannie & Freddie. That did not happen.

Yes, the government bailed out Fannie & Freddie for $187 billion during the financial crisis. However, Fannie & Freddie have returned more than $255 billion to the Treasury via net profit sweeps. Therefore, it has been a profitable investment for the Treasury, so just like the government did with banks and General Motors, FNMA stock & FMCC stock owners believed they had a case to be freed from government conservatorship.

Unfortunately, I never thought the courts would rule in Fannie Mae (OTCMKTS:FNMA) or Freddie Mac (OTCMKTS:FMCC) favor. However, I did not think a negative ruling would cause such a big hit to FNMA stock and FMCC stock. The reason lies in the actual stock performance.

FMCC and FNMA stock are nothing more than an instrument for speculation. The prospects for long-term net profit sweeps mean a lower Fannie and Freddie stock, whereas the prospects of freedom from government conservatorship means a higher FNMA stock. As you can see in the chart above, Fannie Mae stock hovered right around $2/share for two years. It wasn’t until Donald Trump nominated Steven Mnuchin as Treasury Secretary, and Mnuchin expressed his desire for GSE reform that FNMA stock more than doubled.

Therefore, one can make a strong argument that the market never expected much of anything from the courts.

The Mnuchin play is very much alive for FNMA stock & FMCC stock

My takeaway is simple: A big chunk of the fallout was panic selling, but with FNMA stock now at $2.71/share, just about all of the Steve Mnuchin Treasury Secretary effect has been eliminated. That’s wonderful news for investors like myself who fully expect GSE reform, or those who did not previously own.

Remember, there were never high expectations from the court. FNMA stock and FMCC stock’s rally since November was the effect of an incoming Treasury Secretary who wanted to separate government from the housing market coupled with an Administration that favors fewer regulations and less oversight.

That said, the road ahead won’t be easy. We previously told BNL Members that it will be a rocky road, and that’s why FNMA stock amounts to a very small stake in the BNL Portfolio. However, the likelihood for a private market solution that involves investors fronting the capital for Fannie Mae and Freddie Mac to meet their capital requirements is just as likely right now as it was two weeks ago. Nothing has changed there.

The only difference now is FNMA stock and FMCC stock are 35% cheaper. I think that’s important given how GSE reform could easily push these stocks upwards of $25/share. Thus, Fannie stock and Freddie stock are still worth a small position.

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2 Comments

  1. Posted February 21, 2017 at 7:28 pm | Permalink

    I have had a small investment in FMCC since 2009, picking up shares for .37/share, so I’m still, even after the drop, way up on the investment. Since I got it for so cheap, I don’t worry about the stock much and will hang on despite any dip. But what are the actual chances that Mnunchin will actually be able to privatize FMCC/FNMA? After all, they are veritable cash cows for the government and I can’t see Congress being willing to give up all that free money.

    • Posted February 21, 2017 at 7:32 pm | Permalink

      It’s hurting the housing market. They can’t keep it like this forever. There was never a long term plan for the government to own them. The government won’t give the money back, or allow them to build enough capital. The only solution is private market, an offering of sorts, and I think it is highly likely

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