Fannie Mae-No Politics (FNMA)

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Should You Invest In Fannie Mae Stock?
By Wendy Connett

Buying Fannie Mae stock is not for the faint of heart. The mortgage giant has been through the much since the housing and financial markets imploded in 2008.

Some Background

The Federal National Mortgage Association (FNMA), typically called Fannie Mae, is the largest funder or backer of 30-year fixed-rate mortgages. Fannie Mae does not provide mortgages directly to borrowers. It purchases and guarantees them through the secondary mortgage market and pools them to form mortgage-backed securities (MBS). Institutions including insurance companies, pension funds and investment banks purchase its MBS. (For more, see: Fannie Mae: What it Does and How it Operates.)

Fannie Mae is one of two of the largest purchasers of mortgages on the secondary market. The other is the Federal Home Loan Mortgage Corp., or Freddie Mac. Both are government-sponsored enterprises (GSEs).

Fannie Mae was founded in 1938 by Congress during the Great Depression to stimulate the housing market. By investing in the mortgage market it creates liquidity for lenders, which in turn allows them to underwrite more mortgages increasing availability to borrowers. (For more, see: How Does Fannie Mae Make Money?)

Bailout and Delisting From NYSE

In the latter half of 2008 during the height of the credit crisis, Fannie Mae and Freddie Mac were taken over by the government via a conservatorship of the Federal Housing Finance Committee. Both were saved from collapse after the government bailed them out to the tune of $187.4 billion. Under the conservatorship both the GSEs’ profits go to the government.

Fannie Mae has been publicly traded since 1968 and now trades over the counter under (FNMA). It traded on the New York Stock Exchange until 2010 but was delisted after its stock plummeted below the minimum capital requirements mandated by the NYSE. (For more, see: How Fannie Mae and Freddy Mac Were Saved.)

Shareholder Lawsuits

Fannie Mae has caught the eye of some big investors, including hedge fund managers, some of whom have filed lawsuits against the government that essentially allege it is violating the rights of shareholders by allocating the GSE’s profits to the U.S. Treasury.

In late September a court threw out the first of approximately 20 suits filed so far. (For more, see: Fannie Mae, Freddie Mac and the Credit Crisis of 2008.)

Proposed Bills

How, if and when Fannie Mae will emerge from conservatorship status is up in the air. Several proposed bills have sought to remake Freddie Mae and sibling Freddie Mac entirely. One bill that has cleared the Senate Banking Committee would phase out both of them. They would be replaced with a private insurance system for mortgage securities and the Federal Mortgage Insurance Corp. would be established to provide a partial federal guarantee for mortgage-backed securities.

It's unclear how any remake of Fannie Mae and Freddie Mac would mean for investors at this point.

Profitability

Fannie Mae has come a long way since it was rescued by the government in September 2008. It has been profitable for the last 10 quarters. In the first and second quarters of 2014 it earned $5.3 billion and $3.7 billion in net income, respectively. To date it has repaid the government more than what it received in the bailout. Fannie Mae’s stock price has ranged from a high of $6.25 to a low of $1.26 in the last year as of the end of September 2014. It closed at $2.69 on Sept. 30. (For more, see: What you Need to Know about Fannie Mae Mortgages.)

The Bottom Line

Despite a major turnaround, Fannie Mae’s future remains in limbo. If you're adverse to high-risk investments, you should probably steer clear. But if you are able to ride the roller coaster for the long term, high risk could turn out to be high reward. (For more, see: The Over-the-Counter Market: An Introduction to the Pink Sheets.)

http://www.investopedia.com/articles/investing/100314/should-you-invest-fannie-mae-stock.asp