What's the deal with Fannie Mae (FNMA) and Freddie Mac (FMCC)?

They've both been skyrocketing recently with another spectacular day for both. Fannie gained 11% and Freddie is up 9.5% for the day. What do you guys think long-term? Will the government let these two ever go private? Will the common shareholders get wiped out?

Comments (29)

May 21, 2013

-Nothing will change
-No
-No

BUY AND HOLD

May 21, 2013
UFOinsider:

-Nothing will change
-No
-No

BUY AND HOLD

Not so sure about that. GSE equity is essentially worthless. From what I heard institutional money doesn't care about it and doesn't look at it (debentures are a different story).

The real unwinding of GSEs will come but it's a long process that will likely take 4-7 years. We need private capital to come back. That said, there will likely be some form of a government backstop.

I think DeMarco has done great things as the head of FHFA. DeMarco raising guarantee fees will make things more competitive for private capital (and earlier). I think most analysts see g-fees going up 20-30bps this year (the first Ginnie Mae increase for 2013 already kicked in this April).

The other part of that equation is that we need investors to come back to the private label market (the same ones who got screwed during the crisis...so they have to start trusting again). I don't think private label issuance can really move in a meaningful way until there are more steps taken towards GSE reform.

May 21, 2013
Flake:

there will likely be some form of a government backstop.

This is what's going to push the price up. I know less about institutional money, I know a heckuva lot about the logic driving the gov't, especially this administration, and a bailout is exactly what they're gunning for......and I think they'll get it through congress. Buy now, hold out for the pop, then dump it. I probably should have clarified that last point. This is my best guess

May 23, 2013
i hate audit:

They've both been skyrocketing recently with another spectacular day for both. Fannie gained 11% and Freddie is up 9.5% for the day. What do you guys think long-term? Will the government let these two ever go private? Will the common shareholders get wiped out?

I have read research report in the past that says if FNMA and FMCC no longer exist and private market takes over GSM, the average 30 yr fixed mortgage will increase $300/month, so based on that I have to say privatization is very difficult in the short term.

Since privatizing the mortgage market is far far away, I don't think that common shareholders will get wiped out in the mean time.

In terms of long-term business model, I think the most important question I want to ask is that how do they make money. Here is what I found on Answers wiki. Not sure how accurate the info is though:

Please correct if you think it's wrong, I am interested in hearing from all of you

There are five players in the transaction:

1) borrower (home buyer) 2) lender ( let's say local bank) 3) Fannie Mae 4) Government 5) Investor ( say insurance company)

- borrower buys a house and borrows money from the local bank at say 6.25% (your average low interest rate)

- Fannie Mae buys this loan from the bank and pays the bank .25% servicing fee for the life of the loan. So bank collects the money from the borrower, remits the payments to the FM. So bank got its money back and can make more loans, plus it has .25% revenue for the life of the loan. The bank is happy.

- So FM now receives his 6.25% from the borrower, but pays the bank .25% of it, so it actually is only getting 6.00%. The thing is that FM has a line of credit with the US Treasury, so it can borrow very cheaply, say at 3%. So it can pocket the difference.

- The primary role of FM (mandated by the US government) is to create a secondary market for those mortages, meaning: it has to take for e.g. 50 of $200,000 mortgages and make a $10,000,000 bond out of them and sell it to insurance company (e.g. AIG) at 4.5%. AIG will be happy to receive 4.5%. It is rather low, but the bond is backed by FM, which is backed by the government. The perceived risk is low and we know that low risk generates low returns, but it is safe.

- So insurance company is happy to receive 4.5% on its safe investment. FM is happy to pay 4.5% to the insurance company, because it is receiving 6% (6.25-.25) from the borrower and it only has to pay the government back 3% and can borrow more if needed.

Problem: If the borrower does not pay (and remember FM is only allowed to buy conventional loans - no adjustable rate, interest only and other creative crap) due to regular economic hardships, FM has to come with cash to service that debt to investors.

May 25, 2013
mickeyd:
i hate audit:

They've both been skyrocketing recently with another spectacular day for both. Fannie gained 11% and Freddie is up 9.5% for the day. What do you guys think long-term? Will the government let these two ever go private? Will the common shareholders get wiped out?

I have read research report in the past that says if FNMA and FMCC no longer exist and private market takes over GSM, the average 30 yr fixed mortgage will increase $300/month, so based on that I have to say privatization is very difficult in the short term.

Since privatizing the mortgage market is far far away, I don't think that common shareholders will get wiped out in the mean time.

In terms of long-term business model, I think the most important question I want to ask is that how do they make money. Here is what I found on Answers wiki. Not sure how accurate the info is though:

Please correct if you think it's wrong, I am interested in hearing from all of you

There are five players in the transaction:

1) borrower (home buyer) 2) lender ( let's say local bank) 3) Fannie Mae 4) Government 5) Investor ( say insurance company)

- borrower buys a house and borrows money from the local bank at say 6.25% (your average low interest rate)

- Fannie Mae buys this loan from the bank and pays the bank .25% servicing fee for the life of the loan. So bank collects the money from the borrower, remits the payments to the FM. So bank got its money back and can make more loans, plus it has .25% revenue for the life of the loan. The bank is happy.

- So FM now receives his 6.25% from the borrower, but pays the bank .25% of it, so it actually is only getting 6.00%. The thing is that FM has a line of credit with the US Treasury, so it can borrow very cheaply, say at 3%. So it can pocket the difference.

- The primary role of FM (mandated by the US government) is to create a secondary market for those mortages, meaning: it has to take for e.g. 50 of $200,000 mortgages and make a $10,000,000 bond out of them and sell it to insurance company (e.g. AIG) at 4.5%. AIG will be happy to receive 4.5%. It is rather low, but the bond is backed by FM, which is backed by the government. The perceived risk is low and we know that low risk generates low returns, but it is safe.

- So insurance company is happy to receive 4.5% on its safe investment. FM is happy to pay 4.5% to the insurance company, because it is receiving 6% (6.25-.25) from the borrower and it only has to pay the government back 3% and can borrow more if needed.

Problem: If the borrower does not pay (and remember FM is only allowed to buy conventional loans - no adjustable rate, interest only and other creative crap) due to regular economic hardships, FM has to come with cash to service that debt to investors.

yeah that sounds about right. i dont think anyone's questioning FNMA or FMCC's ability to continue to bring in profits, they are practically printing money at this point. ppl just are not sure what to make of the two due to the government's conservatorship. as it stands right now, all the profits of FNMA and FMCC are going straight to the government BUT these are not going to pay down the debt owed to the government. so even with all the money these two are bringing in, the profits they are generating are neither staying in-house nor paying down the debt they owe government. essentially the government is holding these two hostage based off of an amendment they passed last summer which said that FNMA and FMCC's profits will go entirely to the government but not to pay down the debt balance. i, along with other investors, are banking on the fact that this is not something the government can continue to do indefinitely. at some point, the profits will need to be used to pay down the debt balance. once this is allowed to happen and FNMA and FMCC are no longer under government control, the stock price should shoot up (prob not to pre-2008 levels but to a level that is more in line with a company generating billions in profits per quarter)

also, both FNMA and FMCC shot up ~40% today. these two are on fire. i'm prob going to sell off some of my shares to lock in a profit on tuesday and buy in again if the price dips.

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May 25, 2013

Enlighten yourself.

May 25, 2013
Cash4Gold:

Enlighten yourself.

Thanks...

I was looking to get a conversation started about the future of the GSE's with the GOP controlled house. Their fate is largely in the hands of politicians so I was looking fro some insight in that area.

Earn it.

May 25, 2013

gov controlled

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May 25, 2013

right up until you started acting like a reject from a casting of "Friends".

May 25, 2013

This is America. Nobody wanted it to be government controlled- it was the only option left. Treasury Secretary Paulson and Fannie/Freddie execs went around the street trying to get private sector funding but surprise surprise nobody wants a piece of that rotten pie. So the government has to eat it.
I don't think many people know the long run implications, but in the short run mortgage rates will go down (assuming banks pass the savings), fiscal spending (and maybe taxes) goes up, and holders of Fannie/Freddie common stock continue to hold their semi-worthless pieces of paper. That's basic.

BTW- beautiful girlfriend.

May 25, 2013

it had to be done. If Fannie and/or Freddie collapsed, the secondary mortgage market would have evaporated and we would have gone straight into a depression.

May 25, 2013

Fannie and Freddie were able to practically print money when times were good and know the govt would have to bail them out if we experienced a bad downturn.

The govt oversight missed their whole acctg scandal by a mile.

Shame on the creation model and shame on the regulators and auditors. I hope the appropriate parties are held responsable.

May 25, 2013

Jim Rodgers highlights some good reasons against bail out on CNBC at http://www.cnbc.com/id/25684069.
www.sharpeinvesting.com

May 25, 2013

also an excellent article explaining the situation, issues, and outlook is one from the most recent issue of the economist. it also talks a bit about the credit crisis in general...I highly suggest taking a look at this for anyone who wants to better understand this mess.

http://www.economist.com/finance/displaystory.cfm?...

May 25, 2013

I haven't heard the terms of the transaction. Is it clear yet what happens to the current equity? Subordinated? Wiped out?

I think the bigger concern in the macro sense is the preferred stock.

  • Capt K
May 25, 2013

Found a bit of info from this article: http://biz.yahoo.com/ap/080907/mortgage_giants_wal...

The bailout itself does have its negatives -- notably, diluting Fannie's and Freddie's common and preferred shares to near-worthless levels.

  • Capt K
May 25, 2013

Market seems to love this....

Dow futures + 250
S&P futures + 33.50

I think FNM opens @ $1 FRE opens @ .80

"Oh the ladies ever tell you that you look like a fucking optical illusion" - Frank Slaughtery 25th Hour.

May 25, 2013

trade4size, where did you get those numbers at... $1 and .80?

May 25, 2013

the govt is taking 79.9% of each firm. I took the last price and multiplied by .20. Who knows though. The open will come down to a sell imbalance. I have no idea how to trade this much less price it. Just throwing my thoughts out there.

"Oh the ladies ever tell you that you look like a fucking optical illusion" - Frank Slaughtery 25th Hour.

May 25, 2013

Thanks trade4size. Curious to see what goes down tomorrow when its plastered all over the press, too.

May 25, 2013

both FRE and FNM are trading btwn 1.5 and 1.8 pre market

May 25, 2013

I ballparked it pretty good.

My quotes are going absolutely ballistic on these names.

"Oh the ladies ever tell you that you look like a fucking optical illusion" - Frank Slaughtery 25th Hour.

May 25, 2013
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