Investing in Fannie and Freddie remains, at this point, a political trade and not a financial one because the companies aren’t allowed to repay the $188 billion that they owe the U.S. Treasury, and all of their profits are swept away by the Treasury as dividend payments, making it impossible for them to rebuild capital.
Recapitalizing Fannie and Freddie is viewed as a nonstarter by officials in the Obama administration, which has repeatedly said that the companies will be wound down. A former White House housing advisor earlier this month told The Wall Street Journal that given the current political environment, a bet on Fannie and Freddie faces “unimaginably long odds.”
The upshot is that for the stock to ever have value, one of three things must happen: shareholders will have to outlast the Obama administration and hope that by 2017, a new administration takes a different view towards Fannie and Freddie. Second, Congress would have to pass a bill that preserves the corporate entities of Fannie and Freddie once it embarks on overhauling the nation’s $10 trillion mortgage market. Third, shareholders would have to successfully challenge in court the conservatorship agreements that provide for the U.S. Treasury to provide billions of dollars of aid to keep the companies afloat and that allow them to sweep away any profits.
The risk facing shareholders stems from the likelihood of the government “giving nothing to the equity holders,” said Adrian Miller, director of global market strategies at GMP Securities LLC in New York.
Fannie closed 2012 at 26 cents, up from a post-takeover low of 19 cents in July 2010. The shares traded as high as $5.44 on Wednesday before sliding to recently fetch $3.12, down 96 cents or 24%.
Fannie Mae said earlier this month it will pay the Treasury Department $59.4 billion after reporting a record quarterly profit.
The company, boosted by the housing market’s turnaround and lower rates of soured loans, said last month that it “expects to remain profitable for the foreseeable future” — a remarkable reversal following massive losses in the housing bust. Timothy Mayopoulos, Fannie’s chief executive, said the past year “marked a turning point for us.”
The company’s bottom line renewed optimism among some investors, in spite of the considerable hurdles facing the shares.
“With these quasi agencies making so much money, it will be very difficult for the government to tell equity holders your claims are worth zero, a position previously assumed at the lows of the crisis,” said Andrew Brenner, head of international fixed income at National Alliance Capital Markets in New York.