jobe

Why I Finally Bought Fannie Mae

FNM and FRE Will Survive as Structured Today


"Federal National Mortgage Association (Fannie Mae) is engaged in providing funds to mortgage lenders through its purchases of mortgage assets, and issuing and guaranteeing mortgage-related securities that facilitate the flow of additional funds into the mortgage market. The Company also makes other investments that increase the supply of affordable housing. It is a government-sponsored enterprise (GSE) chartered by the United States Congress and is aligned with national policies to support expanded access to housing and increased opportunities for homeownership. The Company is organized in three business segments: Single-Family Credit Guaranty, Housing and Community Development, and Capital Markets."

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Many investors are switching their thoughts as to how the GSEs will be "backstopped." Rather than wiping out hundreds of pension funds along with their many retirees, the Treasury should utilize the recently congress-approved "unlimited loan funding" measure. This will allow the GSEs to function in a normal manner until the housing crisis passes, the GSEs recover and to pay back the loans with interest, thereby NOT risking taxpayer monies, except in a last ditch solution. This will allow the GSEs to remain in their currently existing structure as desired by the government entities, i.e., as shareholder owned entities ... the capitalist way.

The stock price is rising today due to the realization that this is going to be a long, drawn out process, but the companies will survive perhaps forever, but, if not, the stock is a good trade for a long, long time.

This solution also allows the federal government to avoid the blackest black eye over their apparent negligence of a problem that was seen building for many, many years and for which they were repeatedly warned. Also, they allowed the implicit, almost explicit investment assurances to thrive. For that reason, and to avoid a complete lack of faith and a growing distrust in government by its citizens, the Treasury will not take any action that will lead to worthless stock.

FNM and FRE have both declined to ask for help and the Treasury has not offered help. The reason is clear: when the GSEs really need funds in order to roll over their debt and continue to survive, the loans will be made available. In the meantime, they will have the opportunity to work their way out of the mess they are in ... at least, reduce their need for outside assistance over time. Ultimately, the GSEs' monopolistic power will be reduced and greater privatization will take place.

Many see this situation as a great investment opportunity.