Fannie And Freddie Face An Uncertain Future

Federal National Mortgage Association (OTC: FNMA) and Federal Home Loan Mortgage Corp (OTC: FMCC) investors have gotten a lot of good news about the government-sponsored enterprises’ future in recent months. Unfortunately, that good news hasn't been reflected in the stocks’ share prices.

In the past month, Fannie Mae and Feddie Mac’s common stocks have declined by more than 15 percent each, and Height Securities analyst Edwin Groshans says there's simply too much uncertainty remaining when it comes to Fannie and Freddie.

More Waiting Ahead

According to Groshans, shareholders will likely not be getting the resolution they had hoped for from a housing finance bill in 2018.

“Based on the latest reports, the gaps in the Senate’s draft bill reforming housing finance and the GSEs, the concept of keeping the newcos under government control after raising capital, and the limited amount of time before the August break appear to create significant hurdles that will likely work against the legislation becoming law in 2018,” Groshans wrote in a Thursday note.

Bloomberg has reported the GSE’s future will be decided by a section of the new housing finance bill that is currently marked “open pending further discussion.”

The End Of Fannie And Freddie?

Groshans says the Bloomberg report suggests the government will relinquish its senior preferred shares of Fannie and Freddie stock, leaving the door open for senior preferred shareholders. Common shareholders may be left out in the cold.

“The article also noted that the yet-to-be-released draft bill technically kills Fannie Mae and Freddie Mac while preserving their core operations,” Groshans wrote.

The new report suggests the Federal Housing Finance Agency could place the GSEs into receivership and liquidate their assets, transitioning the company’s personnel and infrastructure to entirely new entities. Groshans said this approach would cost taxpayers hundreds of billions of dollars and make the government’s Fannie and Freddie warrants worthless.

Price Action

Investors certainly didn’t like what they saw from the Bloomberg report on Thursday. Fannie and Freddie common shares both traded down by more than 2.7 percent on Thursday.

Related Links:

Fannie Mae, Freddie Mac Preferred Shareholders Could See Huge Upside From Conversion Process

‘A Sea Change Underway': Fannie Mae, Freddie Mac To Retain Capital Again