Fannie, Freddie stocks backtrack after rally
Mike SP
Shares in Fannie Mae (OTCQB:FNMA) and Freddie Mac (OTCQB:FMCC), the mortgage giants in U.S. government conservatorship since 2008, both partly retraced on Wednesday the outsized gains they made in the previous six sessions.
Early Wednesday afternoon, FNMA stock sank 16% after rising 33% on Tuesday and 14% on Friday. FMCC dropped 11%, following a 23% gain on Tuesday and an 8.3% increase on Friday. Year-to-date, (before Wednesday's drop), Fannie (OTCQB:FNMA) stock climbed 156% and Freddie's (OTCQB:FMCC) gained 103%.
On Tuesday, Odeon Capital analyst Dick Bove attributed the government-sponsored enterprises' (GSEs) recent gains to a potential legal decision, as well as political and economic speculation.
A potential breakthrough in a shareholder lawsuit against the U.S. government may have some investors bullish on Fannie (OTCQB:FNMA) and Freddie's (OTCQB:FMCC) stock. In August, a jury found in favor of the plaintiffs and awarded $612M to the plaintiffs. But the presiding judge, Senior Judge Royce Lamberth, hasn't yet issued a verdict or determined who payments to shareholders should be made, Bove said.
He noted that, whatever the verdict, it's believed there will be an appeal. "The timing for this could be as long as 18 months away," he said.
The potential political catalyst is the U.S. presidential election. Donald Trump's previous intention to release FNMA and FMCC from government control has investors believing that if he is elected, he'll take steps to ensure that shareholders will be treated well. "Thus, investors tend to buy these stocks whenever it appears Mr. Trump's ratings rise in the polls," Bove said.
However, the analyst sees little chance of Trump succeeding in spinning out Fannie (OTCQB:FNMA) and Freddie (OTCQB:FMCC) if he wins the presidency. He pointed out that the two GSEs paid the U.S. government $34.8B in the past four quarters. "If elected, I am not sure at all that a new Trump administration will do what the old Trump administration refused to do," Bove said.
In a third potential catalyst, a housing crisis would precipitate the release of Fannie and Freddie from their conservatorships. Bove sees no housing crisis imminent.
He does see two events that could bolster the stock eventually. There could be a breakthrough in the Washington, DC, legal case years from now. And newly proposed Basel "endgame" regulations could push traditional banks out of home finance, prompting the government to release Fannie (OTCQB:FNMA) and Freddie (OTCQB:FMCC) to replace them. traditional banks.
"I am holding on to my stock and I suggest that other holders do the same," Bove wrote. "The prize, if we ever receive it, promises to be unusually large."
