Fannie Mae, Freddie Mac Shares Tumble

Fannie Mae, Freddie Mac Shares Tumble

Fannie Mae

Photo by NCinDC

Common shares of Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) fell yesterday after US Senators Tim Johnson (D., S.D.) and Mike Crapo (R., Idaho) announced their proposal, based largely on the previous Corker-Warner plan, to eliminate the two government sponsored enterprises (GSE) and replace them with private companies. But the biggest investors that have been battling government policy in the courts haven’t backed down, and are gaining support within the Senate.

Fannie Mae, Freddie Mac’s common shares plummet while preferred shares dip

Before the full income sweep was announced, hedge funds, state pension funds, and other large investors had mostly bet on senior preferred shares of Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) because they had guaranteed dividend payouts (though Bill Ackman’s Pershing Square put more money into common shares). The common Fannie shares fell by 32% yesterday, and common Freddie Mac share fell 28%, but the preferred series S fell by just 3%, reports Nathan Vardi at Forbes.

The difference is that common stock doesn’t have any guaranteed dividends, so those shareholders don’t have as strong of an argument that the income sweeps are violating their rights. By staying in, preferred share investors are essentially betting that the new proposal doesn’t change their risk. It has been clear for some time that the federal government had no intention of paying dividends or recapitalizing Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC), and the future value of those shares has rested on getting a favorable decision from the courts. With historic levels of deadlock and strong disagreement about the federal government’s proper role in the secondary mortgage market, investors’ lawsuits against the government may wind their way through the courts faster than new legislation can be passed.

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Toomey supports ‘rule of law’

Opposition to the Johnson-Crapo proposal over the income sweeps has already begun, with Senator Toomey (R., PA) sending a letter to US Treasury Secretary Jack Lew questioning the legality of the sweeps, and pointedly telling Lew that the rule of law is a central part of what makes the US an attractive place to invest.

“Sen. Toomey believes that the sanctity of a contract, between government and its shareholders, must be respected,” Toomey staff director Tonnie Wybensinger wrote in an email. “While he supports comprehensive GSE reform, Sen. Toomey will likely find it hard to support any reform legislation that does not uphold rule of law.  He hopes to see legislative language that allows for an orderly unwinding of the GSEs—through a transparent set of bankruptcy rules—immune to political influence.”

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