Federal National Mortgage Assctn Fnni Me (OTCMKTS:FNMA) and Federal Home Loan Mortgage Corp (OTCMKTS:FMCC) shares plummeted on Tuesday following an unfavorable court ruling. The ruling blocked a major legal path forward for shareholders.
The situation for Fannie Mae and Freddie Mac investors is complicated to say the least.
While the ruling was certainly a blow to the bull case for investors, it wasn’t quite the death knell. The bull case for FNMA and FMCC is certainly still alive.
Fannie Mae and Freddie Mac Need Something to Change
As it stands today, FNMA stock and FMCC stock are utterly worthless. The only reason the two stocks aren’t trading at $0 is because investors believe that the companies’ situation will soon change.
Fannie Mae and Freddie Mac earned a combined net income of nearly $10 billion in Q4. Unfortunately, under the terms of the two companies’ bailout agreement, every dime of Fannie and Freddie’s profits go to the Treasury. Even if Fannie Mae and Freddie Mac made $1 trillion in profits, shareholders don’t get even a whiff of any of those earnings.
Shareholders believe the terms of the Fannie Mae and Freddie Mac “net-worth sweep” are illegal and have challenged it in court. However, back in 2014, a judge threw out shareholders’ case against the net-worth sweep. Hopeful investors were counting on an appeals court to overturn that decision.
Unfortunately, the appeals court upheld the judge’s decision this week, sending FNMA and FMCC shares into a tailspin.
Fannie Mae and Freddie Mac Investors Still Have a Legal Path
Now that the bad news is out of the way, let’s get to the good stuff. The legal window of opportunity for Fannie Mae and Freddie Mac shareholders may have closed a bit this week. Fortunately, it’s the window is not shut. At this point, shareholders still have two options in the courtroom. First, they can continue to appeal. This route involves either asking for a rehearing from the full appeals court or taking the case up to the Supreme Court. Of course, this path would involve overturning the decisions of two previous courts.
The other legal option may be a bit more realistic at this point. The appeals court threw out the case against the government. But it also ruled that shareholders were free to pursue breach-of-contract claims.