The bipartisan bill being forwarded by Senate Banking Committee Chairman Tim Johnson and Senator Mike Crapo that would begin the process of winding down and replacing Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) has investors running for the hills.
This action comes despite significant investor activism by Ralph Nader and others who are lobbying for Fannie and Freddie shareholders to share in the profits the bailed-out GSEs are now producing.
Fannie Mae and Freddie Mac back around 60% of all U.S. home loans today. Their role in the process is to supply mortgage funds by buying loans from lenders and packaging them into securities that they then sell to investors.
Fannie Mae and Freddie Mac shares dropping
When the news about the bill came out on Monday, the prices of the GSEs began to slump. The PPS of the stocks continued to tumble yesterday, March 18, with Federal Home Loan Mortgage Corp (OTCBB:FMCC) closing at $3.03 down 71 cents from its price of $3.74 after the close on Monday.
Even Fannie Mae’s preferred stock was down. It closed at $10.05, down 60 cents from the previous day, with a stock volume of 3,911,600, more than twice the average daily volume of 1,653,253 shares.
Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) continue to slump today, with most issues off another 2% or 3%.
Details of the proposed bill
The bipartisan Senate bill calls for replacing Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) with a new government reinsurer named the Federal Mortgage Insurance Corp. The new entity would be funded by user fees. FMIC would be authorized to issue a federal guarantee for mortgage bonds, but the guarantee would only kick in after private creditors had taken losses of at least 10%.
Until recently, most political analysts had been highly skeptical regarding the chances for passing a bill to wind down Fannie and Freddie, especially in an election year. But some political pundits are saying this bipartisan bill has a real chance to pass the Senate. The chances of the bill getting through the House, however, are significantly longer. Based on prior statements, President Obama would be likely to sign the bill in its current form.