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  • Initial Price Target Of $19.8 For Fannie Mae 8 comments
    Jun 12, 2013 12:40 PM | about stocks: FNMA

    The severely depressed stocks can always see remarkable recovery. Many stocks have shared the same pattern in the past few years. Las Vegas Sands' share has jumped from $1.38 of March 9, 2009 to over $56 soon after, an increase by 4,058%, 40 times higher. Fannie Mae's share price has also been severely depressed, but will Fannie Mae see the same recovery pattern.

    The stock market has been struggling on appropriate pricing for Fannie Mae in the past few weeks, and made Fannie Mae share swing substantially. A few hedge funds are shorting sell Fannie Mae in order to get more Fannie Mae at lower costs.

    The price depression of Fannie Mae had its justification: it was designed to avoid another Great Depression. The mission was achieved gloriously: it was only a Great Recession, and a quicker recovery (Fannie Mae has shouldered over 90% of new loans during the ongoing recovery). The recent US lawsuits against big banks have shown that the planned so-called rescue funds for Fannie Mae are simply equivalent to the amount by which big banks wronged Fannie Mae. Fannie Mae was simply a scapegoat for what went wrong at big banks. This is perhaps partly the reason why analysts at big banks continue to be reluctant to show genuine interest in Fannie Mae and would rather like to see Fannie Mae to shut down or get liquidated with zero value to common shares.

    The public-private partnership model of Fannie Mae has not failed. It was not designed to help avoid another Great Depression at no cost. Indeed, there was a cost of frustration only. State-owned Chinese companies are trading well in China and also in New York. Fannie Mae has been closely monitored by politicians to assure public interests and by private investors to ensure profitability. This kind of scrutiny is not available for any other business model. It is a great example of check and balance in the housing market.

    Fannie Mae share price may be considered for two scenarios.

    First scenario: liquidation. In this case, new shares will be issued to private investors. The liquidation experience of Sallie Mae can be relevant. During Sallie Mae's liquidation, its share price increased by three times. Fannie Mae's share reached $5.44 on May 29, 2013. With Sallie Mae's multiplier, Fannie Mae share can be expected at $16.32.

    Second scenario: decent return to market. In this case, the standard analysis can be applied. KBW analyst Bose George estimated that Fannie Mae can generate normalized annual EPS of around $2. The average P/E for mortgage industry stands 9.9, and can be much higher. With EPS at $2, Fannie Mae share should be expected at a value of $19.80.

    However, the first scenario is unlikely to happen, since any new model of Fannie Mae will have to subject to the following four tests:

    1. Foreign borrowing test. Fannie Mae has been a useful tool to tap foreign savings (such as Chinese and British) at low costs for financing US housing market. The liquidation debate has already pushed away foreign investors, and US Treasury and the Federal Reserve have had to buy bonds from Fannie Mae recently. Implicit government support has been indeed used for the advantage of American national interests. There is serious doubt that any other business model can attract the same level of foreign interests.
    2. Built-in economic stabilizer test. Fannie Mae was designed to help avoid the disaster of Great Depression. The benefit of Fannie Mae to Americans in the recent great recession is the relative intactness of $6 trillion mortgage market. The former U.S. Treasury Secretary Henry M. Paulson confess at that time that without Fannie Mae, mortgages would be harder to obtain and much more expensive. The benefit of Fannie Mae to American per capita amounted to $19,737. Going back to a pre-1938 system with public insurance will be much more expensive in the case of similar economic crisis.
    3. Recovery boost test. During the recovery up to now, Fannie Mae has been responsible for 90% of new loans while private sector is still waiting for market turnaround. It would take much longer to recover without Fannie Mae, definitely beyond this Administration. President Obama has been very smart in allowing Americans to benefit from Fannie Mae by not endorsing any different business model for Fannie Mae. The benefit of Fannie Mae to Americans in the recovery is $3.5 trillion mortgage market, and the benefit to every American on average is $11,364. Without Fannie Mae, President Obama may not be able to see housing recovery during his presidency.
    4. Public scrutiny test. Mortgage market is not only a business but also a politics since three fourths of American families are involved. The housing system cannot be tailored to only public interests, or private investors. It should be designed to address both perspectives. Hybrid public-private business models offer the only opportunity to accommodate both public and private interests.

    Given the above considerations, far-sighted politicians in Washington will unlikely opt for liquidation. The initial price target for Fannie Mae should be set at $19.80, which is calculated under the second scenario.

    Disclosure: I am long RDN.

    Stocks: FNMA
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Comments (8)
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  • 901Wizard
    , contributor
    Comments (32) | Send Message
    Nice writing. Excellent info. I have already bookmarked it. Yes, liquidation might be an option. But after billions of profit, it is an unlikely event to take place. Fannie and Freddie has proven their validity once again. We have to remember Fannie did not do well only for 4 years in her 74 years of life span since 1938. The collapse in 2008 occurred due to defaulters who basically do not deserve to own home loan. Again liquidation does not take place during conservator-ship according to FHFA website.
    12 Jun 2013, 08:47 PM Reply Like
  • Retire Young
    , contributor
    Comments (42) | Send Message
    Under the proposed bill it is very likely that the common shares will be worthless. Why do you not consider this possibility?
    26 Jun 2013, 12:23 PM Reply Like
  • user92718
    , contributor
    Comments (166) | Send Message
    So, for people who bought shares at $3 or $4, are they recommended to hold or sell at the current depressed prices!!?
    Advice pls?
    26 Jun 2013, 12:55 PM Reply Like
  • nickcorn
    , contributor
    Comments (17) | Send Message
    Well, it's easy for a writer to give his scenerios especially if he doesn't own 1 share. I don't know anything except what I read. That is this bill seems to have bi-partisan support in the Senate and could do well in the house. Politician on both sides of the isle want to make noise to show people there worth. Ha. I think this bill will hurt the building business, plus they will need lot more time than 5 yrs to replace there structure because these 2 lenders represent at least 65 or 70% of current mortgage business.
    Over kill bill to ring are wonderful representative bell for votes
    26 Jun 2013, 08:33 PM Reply Like
  • Jarshoot
    , contributor
    Comment (1) | Send Message
    Is this really true ..what I hear his the common stock value is 0


    As per this article it should not be a free fall like this to a dollar
    26 Jun 2013, 10:56 PM Reply Like
  • s404n1tn0cc
    , contributor
    Comments (120) | Send Message
    Don't Care and I'm not waiting 5 more Years. Want to make some cash...and as someone once said "Buy the DIPS ..SELL the RIPS". Sound advice.
    28 Jun 2013, 01:29 PM Reply Like
  • user92718
    , contributor
    Comments (166) | Send Message
    at what price you think a good to sell?
    28 Jun 2013, 01:51 PM Reply Like
    , contributor
    Comments (65) | Send Message
    Heh, I was with you right up until this point: "...far-sighted politicians in Washington..."


    I'm long since '09 on the hero-or-zero trade.
    29 Jun 2013, 01:36 PM Reply Like
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