Over the past few months, shares of Federal National Mortgage Association (OTCBB:FNMA) and Federal Home Loan Mortgage Corp (OTCBB:FMCC) soared more than 1300 percent as speculative investors and hedge funds started taking positions in these stocks. Federal National Mortgage Association (OTCBB:FNMA), which started the month of May at 83 cents, briefly changed hands at $5.20. But the craze didn’t last long.

Fannie Mae

Fannie Mae & Freddie Mac Ruined Today

Shares of both companies are being ruined today. Senator Bob Corker, R-Tenn is pushing to wind down Federal National Mortgage Association (OTCBB:FNMA) and Federal Home Loan Mortgage Corp (OTCBB:FMCC) as a part of the government sponsored enterprises (GSE) reform. The government created them to increase liquidity in the mortgage markets by packaging mortgages and selling them as bonds (or mortgage-backed securities) to investors. Corker is drafting a legislation to reform the housing finance system.

Senator Bob Corker is working with his colleagues to develop a pragmatic and sustainable housing finance model that can resolve the GSEs. A few days ago, the acting director of the Federal Housing Finance Agency, Ed DeMarco proposed to lure investors back into the market with the help of two broad approaches to replace both the GSEs.

Senator Bob Corker’s approach is expected to be based on the issuer-based approach where a financial institution guarantees the repayment of the principal and interests to investors. In this approach, the issuer’s guarantee will be backed by investors’ capital and will have a further credit enhancement as a government guarantee on the bonds or mortgage-backed securities issued.

End the Dominance of Fannie Mae and Freddie Mac?

The same senators introduced a bill in March that prevented the government from using guarantee-fee increases at both firms to cover other expenditures. The Jumpstart GSE Reform Act will also forbid the sale of GSE-preferred shares owned by the Treasury Department without approval of Congress.

In other terms, the senators’ ways are similar to DeMarco’s vision of bringing private capital into the market to end the dominance of Fannie Mae and Freddie Mac. Federal National Mortgage Association (OTCBB:FNMA) shares tanked 28.42 percent to $2.92 and Federal Home Loan Mortgage Corp (OTCBB:FMCC) shares were down 28 percent to $2.70 at 3:18 PM EDT.