Fannie Mae Shares Tank; Common Shares Could Be Wiped Out

By Mani
Updated on

Fannie Mae / Federal National Mortgage Association (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) shares surged to five-year high last week, despite uncertainties surrounding the proposed bipartisan bill, reports Bloomberg.

Fannie Mae Shares Tank; Common Shares Could Be Wiped Out


Kathleen M. Howley & Jody Shenn of Bloomberg feel the new bipartisan bill currently under preparation might push the company into liquidation and make the shares of the state-owned mortgage giants worthless.

U.S. senators are giving final touches to a proposal to liquidate the state-owned mortgage giants, Federal National Mortgage Association (OTCBB:FNMA) (Fannie Mae) and Federal Home Loan Mortgage Corp (OTCBB:FMCC) (Freddie Mac), and substitute them with a government re-insurer of mortgage securities backed by private capital.

Morgage Companies’ Shares equal BlackRock & Starbucks Market Cap

The stock price of  the state-owned mortgage giants catapulted eight-fold during this year and took their combined market capitalization to $48 billion, roughly the same as BlackRock, Inc. (NYSE:BLK) and Starbucks Corporation (NASDAQ:SBUX).

The mortgage giants’ prices appreciated recently backed by recovery in the U.S. mortgage. Fannie Mae’s (OTCBB:FNMA) stock surged in May from less than $1 to an intra-day high of $5.44 on May 29, giving the company with a market capitalization of about $31.3 billion. Similarly Federal Home Loan Mortgage Corp (OTCBB:FMCC) (Freddie Mac)’s stock price touched $5 taking its market capitalization to $16 billion.

However the state-owned mortgage giants’ stocks have since fallen between 14 and 15 percent today.

Fannie Mae’s Stock Value

Federal National Mortgage Association (OTCBB:FNMA) (Fannie Mae)’s preferred stock having a par value of $25 has risen from 26 cents to $8.24 since the beginning of this year. The preferred stock is speculated to be repaid.

Bruce Bekrowitz’s Fairholme Capital and other leading investors such as John Paulson, Richard Perry and Claren Road Asset Management have cumulatively hold sizeable $2.4 billion in the two mortgage giants’ preferred stocks.

The investors have been campaigning for restructuring and privatization of the state-owned mortgage giants, instead of liquidating them.

According to Ed Mills and Paul Miller, analysts at FBR Capital Markets, the proposed bill in Congress would replace the mortgage giants with a new agency called Federal Mortgage Insurance Corporation. The new agency is expected to bear any catastrophic losses on mortgage bonds after private investors or insurers are wiped out.

Last month, the American mortgage giant Federal National Mortgage Association (OTCBB:FNMA) announced it will pay the Treasury Department $59.4 billion, after posting a record quarterly profit driven by rising home prices and declining delinquencies. The sister mortgage giant Federal Home Loan Mortgage Corp (OTCBB: FMCC) also recorded a net income of $4.6 billion and said it will pay Treasury $7 billion dividend for the quarter.

Wrong Interpretation By Investors

According to the Bloomberg report, Jaret Seilberg, an analyst at Guggenheim Securities LLC’s Washington Research Group, however feels investors are wrongly interpreting the draft bill by assuming that payments the state-owned mortgage firms are now making from all their profits would be included in the calculation.

Thus Jaret Seilberg feels there is a great disconnect between investors and Washington over whether there is any value in the mortgage giants. He feels the senators are unlikely to draft the bill making the dividend payments made to Treasury would be construed as repayment of senior preferred that the government owns.

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