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Fannie and Freddie Are Now Wildly Profitable…But That Still Might Not Save Them

  +Follow June 20, 2013 9:15AM
Tickers Mentioned:

Fannie MaeFannie Mae (FNMA) and Freddie Mac (FMHC) aren’t a money pit anymore. But that might not be able to save them from being dissolved. Thought two of the most infamous names associated with the housing crisis are beginning to see a profit – and might even be able to pay back the federal government – the possibility of them eventually returning to private status remains slight.

Yesterday the Federal Housing Finance Agency (FHFA) upgraded the two companies from having “critical concerns” to only having “significant concerns.” citing their 2012 profits of $17 billion and $11 billion, respectively. While a classification like “significant concerns” on such robust numbers might seem to be damning with faint praise, it’s a huge step for the two embattled housing companies. Still, the government is still more than a little wary of the prospects of their two exceptionally famous wards.

Senators  Mark Warner and Bob Corker are currently working on a bill that would put the companies into receivership, and put into place a new system in which private entities would purchase mortgages from lenders and issue them to investors as securities. If passed, Fannie and Freddie would be done with. And shareholders would get little to nothing.

The government certainly never expected Fannie and Freddie to rebound, and is still skeptical on their future. The 2008 bailout of the companies was itself only a preventative measure and not an investment strategy.  So now the question is, will Fannie and Freddie ever return to privatization and reward their investors? Or will the companies be unceremoniously shuttered?

Let’s look at the particulars of the stocks of both companies, and their future going forward.

Fannie Mae

Fannie had its best year ever in 2012, and the stock has been responding in kind. Falling to as low as 20 cents a share at one point last year, Fannie currently sits at $1.83 (following a dramatic spike to $5.44 last month after the first reports of record profitability.) Fannie has traded heavily, averaging 53.75 million shares in volume a day.

Freddie Mac

Freddie didn’t do quite as well as Fannie, but still posted monster profits. And the behavior of Freddie’s stock has closely mimicked Fannie: it currently sits at $1.70 a share. And Freddie likewise experienced a frenzied spike in May, raising to $5.00 a share in May before coming back to Earth. Trading has been more modest than with Fannie, though still heavy at 22.73 million shares a day.

The Future of Fannie and Freddie Stock

Stockholders in Fannie and/or Freddie want to see a return. In fact, a group of stockholders recently filed suit against the federal government, alleging that the takeover was illegal and that the government is unjustly seizing their property (the shares and theoir profits.) The fact that under the currently structured deal Fannie and Freddie are required to send all of their profits to the government, and not pass them onto investors, further rankles them.

The lawsuit brings up an interesting Constitutional dilemma. The government can’t seize private property without “just compensation.” But a government sponsored entity like Fannie might not qualify as private property, and thus the government won’t be beholden to shareholders at all. Though the case is sitll being considered, legal pundits expect the courts to rule as such.

All this uncertainty has led to behavior in the stocks that is erratic as the day is long. As mentioned above, a dramatic spike in May saw both stocks double in value before crashing back down. This volatility is one of the reasons the government is suspicious of ever letting Freddie and Fannie out of their conservatorship. The status of a government sponsored entity as a stock is difficult to truly value. And their position in a housing market that's far from recovered further colors the perception that neither company is truly stable.

The Problem of Perception

Another reason we might never see Fannie and Freddie privatized again – even if they pay back the bailout – is their ugly public perception. Besides AIG (AIG), Fannie and Freddie are the two names most associated with the housing crisis. And public perception still tends to lean towards the sentiment that these two companies cannot be trusted on the free market.

Considering the government owns 80 percent of Fannie and Freddie, investors put their money into these companies at their own peril. And the way the bailout was structured, common shareholders won’t see a penny before preferred shareholders are repaid. So even though on paper Fannie and Freddie are wildly popular, and upset investors want to see a return on their investments, the idea that Fannie and Freddie could ever return to what they once were is a farfetched one indeed.  

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions.

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  +Follow June 20, 2013 9:15AM



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