Where Theory Meets Reality – Ginnie Mae Takes Out Freddie Mac

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Where Theory Meets Reality – Ginnie Mae Takes Out Freddie Mac

Richard X. Bove, Vice President Equity Research at Rafferty Capital Markets, discusses replacing Freddie Mac with Ginnie Mae.

Where Theory Meets Reality – Ginnie Mae Takes Out Freddie Mac

Hypothetical

Assume for the moment that a government takes the following steps:

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  • It knowingly bankrupts company A; and then
  • Has a company B, which it wholly owns take over the business of Company A that it bankrupted.

Now move that theoretical discussion to reality. Replace Government with the Treasury Department of the U.S. Government; replace Company A with Freddie Mac (FMCC/$1.75/Buy); and replace company B with Ginnie Mae.

Whether the actions taken were by design to shift Freddie Mac’s business to Ginnie Mae or not, the reality is that this is what is happening.

The decline in the yield on the 10-Year Treasury may have wiped out Freddie Mac’s remaining capital. This will be revealed when the company reports its second quarter earnings. Plus, Freddie Mac is incapable of ever recovering its lost capital because the government is entitled to take every dime it earns forever.

Recent published numbers now indicate that Ginnie Mae which is wholly owned by the government has just passed Freddie Mac in terms of guarantees on mortgage backed securities. It has replaced Freddie Mac in many markets. Ginnie Mae will continue to take Freddie Mac’s business and its revenues and profits.

Both the President and Congress are happy with this arrangement as is the media. Thus, it is likely to continue until the markets object and refuse to accept Freddie Mac paper.

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