Fannie Mae-No Politics (FNMA)

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Why FNMA Stock & FMCC Stock Are A Buy Right Now !

Brian Nichols - April 4, 2017



BNL Finance has published over a dozen articles related to Federal National Mortgage Association Fannie Mae (OTCMKTS:FNMA), Federal Home Loan Mortgage Corporation (Freddie Mac) (OTCMKTS:FMCC), GSE reform, and the greatest heist in history: $255 billion in profits from Fannie Mae and Freddie Mac paid to the Treasury as part of its $187 billion bailout during the financial crisis.

The bottom line is the Treasury takes all of Fannie Mae (OTCMKTS:FNMA) and Freddie Mac’s (OTCMKTS:FMCC) profits via government conservatorship. 100s of companies were bailed out during the recession, and all had an exit plan, including the banks and auto makers. Yet, Fannie and Freddie have returned more capital to the Treasury than any other company, and remain in conservatorship.

That’s where we are now, and with that background in mind, let’s explore why now is the perfect time to buy FNMA stock or FMCC stock.

First and foremost, FNMA stock and FMCC stock are nothing more than speculative bets that Fannie Mae and Freddie Mac will eventually get out of government conservatorship. Up until recently, the only hope seemed to be the courts. As a result, FNMA stock fluctuated between $1.50 and $2.50 for most of 2015 and 2016. Call it a $2.5 billion bet.

That price range, $1.5 to $2.5, is telling investors that the market saw no legitimate shot of GSE reform with the courts. If anything, the trading range suggests FNMA stock was nothing more than an instrument for swing traders. As a result, the Perry ruling in February did not shock me one bit. The Court of Appeals for the District of Columbia ruled that net worth sweeps were essentially legal as it pertains to Fannie Mae and Freddie Mac. For those unfamiliar, net worth sweep is what allows the Treasury to leave Fannie Mae and Freddie Mac undercapitalized and allows the Treasury to drain their earnings.

Nevertheless, FNMA and FMCC stock price in 2015 and the majority of 2016 properly illustrated to investors that there was no chance of ending government conservatorship in the courts. It was not going to happen, regardless if a blogger dissected every word of the court decision and finds a couple sentences they view favorably.

However, FNMA stock did not soar from $1.5 to $5/share in late 2016 because of Fannie Mae’s odds in the Perry ruling. No, those gains were driven by Steven Mnuchin being selected by Trump as Treasury Secretary. Mnuchin has publicly stated many times that GSE reform is a top priority. He co-owned the former IndyMac and knows all too well the importance of private market ownership.

Let me stress this once more, not FNMA stock nor FMCC stock soared in late 2016 because of litigation or rulings, but rather Steve Mnuchin’s new role and priorities. Mnuchin is the one person who can make GSE reform a reality with few headaches, and he will. Fannie Mae (OTCMKTS:FNMA) and Freddie Mac (OTCMKTS:FMCC) are arguably the two most important companies in America, with over $5 trillion in outstanding mortgages collectively. Without Fannie and Freddie, the housing market does not exist.

The idea that FNMA stock currently trades at $2.35, the top of its range before Mnuchin came into play, is almost unimaginable. Yes, FNMA stock and FMCC stock are still just speculative bets on GSE reform, but what investors don’t seem to realize is that GSE reform is not only possible, but most likely. The fact that FNMA stock fails to take into consideration Mnuchin’s role is baffling, and sets the stage for what could very well be once-in-a-decade kind of short-term return.

FNMA stock and FMCC stock: Setting the stage
Fact is there are no viable alternatives to GSE reform. The Treasury can not own Fannie Mae and Freddie Mac forever, nor can they fail to have a free market solution long-term. It’s unconstitutional and borderline criminal. This fact gives Steven Mnuchin a systematic advantage against the few politicians who want to keep this cash cow alive.

With that said, we are only a few months into the Trump Administration’s tenure, and there was a lot on the agenda. First was healthcare, now taxes, and my bet is that Mnuchin gets to work on housing reform soon after. In fact, don’t be surprised to see real progress this year and GSE reform by early 2018. It will be complicated, but if Steve Mnuchin can make a deal on the Treasury’s unexercised warrants, which he should be able given his role as the Treasury Secretary, then a common stock offering should do the trick to recapitalize the GSEs, to set Fannie and Freddie free of government conservatorship.

In my opinion, there is no other logical outcome. The Treasury won’t take a “pay cut” and they sure as hell won’t give money back. A private market solution is the only solution, and it is currently impossible because of the warrants. If Mnuchin can solve that problem, and I believe he can, then the 10s of billions that Fannie Mae (OTCMKTS:FNMA) and Freddie Mac (OTCMKTS:FMCC) pay the Treasury each year will be the property of shareholders.

With FNMA stock and FMCC stock supporting market capitalizations of $2.7 billion and $1.5 billion, respectively, the upside is simply incredible. And given the short-term outlook for resolution, it is unwise to seek a cheaper price for FNMA stock and FMCC stock if you believe GSE reform is the eventual outcome. Fact is, a small investment should very well produce massive profits.

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