Fannie Mae and Freddie Mac: A Cold Shower for Preferreds

From Bloomberg:

Fannie Mae and Freddie Mac, the largest U.S. mortgage-finance companies, won’t be able to repay all of the $84.9 billion in federal aid they have received since being seized by the government last year, their regulator said. “Some assets and senior preferreds will have to be left behind as they come out of conservatorship, and that means some of those losses will never be repaid,” Federal Housing Finance Agency Director James Lockhart said at a speech in Washington today. “Their book is so large, it’s hard for me to see that they will be able to repay all of that.”

That this comes as a surprise is astonishing. They are being used as a tool to help support the housing market - as evidenced by the +110 LTV loans they will write - and have become policy corporations.

What is interesting to this humble participant is the statement on leaving behind some preferreds. A while back, it was made known that Treasury and HUD were exploring their options with regard to the GSEs:

Treasury and the Department of Housing and Urban Development, together with other government agencies, will engage in a wide-ranging process and seek public input to explore options regarding the future of the GSEs, and will report to the Congress and the American public at the time of the President’s 2011 budget.

There are a number of options for the reform of the GSEs, including: (i) returning them to their previous status as GSEs with the paired interests of maximizing returns for private shareholders and pursuing public policy home ownership goals; (ii) gradual wind-down of their operations and liquidation of their assets; (iii) incorporating the GSEs’ functions into a federal agency; (iv) a public utility model where the government regulates the GSEs’ profit margin, sets guarantee fees, and provides explicit backing for GSE commitments; (v) a conversion to providing insurance for covered bonds; (vi) and the dissolution of Fannie Mae and Freddie Mac into many smaller companies.

People picked up on this and ran with it, thinking preferred dividends might be reinstated (at some point). FNM S is up 200% since 6/25 when this came out and FRE Z is up 102%.

Is this the cold water that disillusioned participants need? Perhaps, FNM S is down 9.7% since it hit the tape. Look out below. Hope is not a strategy.

Disclosure: Long FRE Z and FNM S (begrudgingly).

Comments

[Iwan:]

It's sad the gov stole from little investors like myself yet allows members of fannnie mae to take under righter out to lunch every week and have conventions for it's employees at luxury resorts I will never be able to afford to go to. This is legal thief I will never trust any politician again!

Jul 30 04:41 PM

[bigtrades_e...:]

Honestly, I think you have to ignore the chatter, these companies haven't even announced earnings yet. I am going to keep buying my preferreds no matter what you may say. I see no reason in selling. I have yet to see the government talk about one thing and actually follow through with it. If they were to do this then that would immediately provoke investors to lose trust in our political and financial system. It completely goes against the white house agenda in encouraging investors to invest again.

I think it was nothing more than a statement to throw in the kitchen sink when the market was up. There are no worries on my part, I see no reason for the Government to actually want to incorporate the GSE's functions into a federal agency. Government knows these entities work best as private entities with moderate support from the government. Truth be told, these GSE's are just too big for our Government to handle, the most likely argument that can be used is that GSE's will be broken down into Granular levels but only after all losses or majority losses are absorbed. Sometimes you have look beyond the trees to see the forest. And if the latter case happens, preferreds is where you would want to be because the spin off of smaller granular companies gives the GSE's enough to buy back Senior Preferreds.

This is a long term buy for me, I will be holding till the cows come home and trust me, they will come home before the end of this current presidential administration.

Jul 31 12:24 AM