This week, the U.S. Senate Banking Committee approved legislation that strengthens congressional oversight of Fannie Mae (FNM) and its sister company Freddie Mac (FRE) two of the largest U.S.-mortgage finance companies.
The overseeing agency would be granted the power to control how much capital the government-chartered companies must hold and would have the power to limit growth and liquidate assets to pay off bondholders. (Both FNM and FRE have agreed to raise a total $24.5 billion in capital over the past six months as they posted an $11.8 billion loss.)
The approved legislation would create a new regulator that would be granted stronger powers to control how much capital the government-chartered companies must hold. It would also have the power to limit growth and liquidate assets to pay off bondholders.
I’m sure both companies, whose primary responsibility is to ease the effect of the housing bust, are surely in no hurry to be regulated by any government agency! That being said, I can rationally say that shares of Fannie Mae and Freddie Mac have finally hit bottom.
Big Losses Today, Future Gains Tomorrow?
Lehman Brothers (LEH) forecasts a loss for both Fannie Mae (FNM) and Freddie Mac (FRE) for the year. No big surprise there. Shares are down some 60% from its 52 week high.
But what does surprise me is what you read in-between-the lines. Lehman states that as credit costs normalize, rising revenues should support significant earnings power and robust balance sheet growth.
Does this mean Fanny Mae stock price might get off its fanny? One can only hope.
Both companies operate in the secondary mortgage market to ensure that mortgage bankers and other lenders have enough funds to lend to home buyers at low rates. In fact, both FNM and FRE handle close to 90% of new loans issued in the U.S. meaning at the end of the day, there’s more money in the mortgage market so that institutional buyers can borrow.
Even as housing prices continue to fall across the United States, housing sales are slowly starting to rise and see some signs of life. And that could potentially breathe new life into stocks like FNM and FRE.
Lehman sees 17% growth for Fannie in 2008, and 9 percent in 2009 and 2010. And the company pays a dividend that is yet intact despite the turmoil in lending. The shares yield over 5% at the current price.
While there may be more downside with FNM in the short-term, building a position at current prices make Rational sense to me. The market seems to have discounted the worst of possible outcomes, but does not accurately account for any upsides surprises. Rational Investors can exploit that discrepancy by accumulating shares now.