Shares of Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) fell off a cliff after U.S. District Judge Royce Lamberth threw out two prominent cases against the government, capping a steady two-month decline with one-day 36% drop. There’s no question that the court ruling is a major blow to Fannie Mae and Freddie Mac shareholders, but it’s also just one part of a larger court battle that was always expected to last for years.
The legal battle over Fannie, Freddie is far from over
Lamberth’s decision will probably be appealed, and Fairholme’s case in the US Federal Claims Court under Judge Margaret Sweeney is still moving through discovery. The people who have been front and center (Fairholme, Pershing Square, Investors Unite, among others) aren’t going anywhere. Certainly none of them are happy about the decision, but the reason there are so many lawsuits – in addition to lobbying and media campaigns aimed at Congress – is precisely because they didn’t want to put all of their eggs in one basket.
Fannie Mae, Freddie Mac stock valuations aren’t based on fundamentals
As I’ve written about before, it’s perfectly reasonable for an investor to decide that the situation is too complicated and simple stay out of the fight over Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC). Instead of taking a position on what the GSEs might be worth as normal companies released from conservatorship, investors have to decide whether they believe Congressional action or one of nearly twenty court cases will eventually go their way. This is more like a distressed debt situation, with a long wait and legal scrapping to get returns, than your typical equity valuation.
By the same token, anyone who had been hoping for returns in the next year or two has realized that Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) are the wrong place to look. Amazingly, Fannie and Freddie are still up 22% from a year ago, and anyone who invested in the aftermath of the financial crisis can take still take a solid profit and move along. Based on today’s price drop many investors are doing exactly that, but you shouldn’t expect the story to die down.