The Trump administration revealed yesterday plans to reform Fannie Mae (OTCQB:FNMA) and Freddie Mac (OTCQB:FMCC), which has sunk both FMCC and FNMA stock.
Investors have been eagerly awaiting the unveiling of Trump’s plans to release the two former lending giants from public ownership, which have been rumored to be coming for weeks. However, the plans have clearly failed to impress speculators as FMCC and FNMA shares are both down over 8% during Friday’s training. Fannie Mae and Freddie Mac have been under government conservatorship since being famously bailed out during the early days of the Global Financial Crisis in 2008.
Why have FMCC and FNMA Shares Sunk?
Despite the long wait for these proposals and both stocks almost doubling in value in the year-to-date, FMCC and FNMA shares are sinking today due to the lack of substance and specifics in the administration’s 53-page report. The biggest sticking point is the Treasury’s net-worth sweep of all of Fannie and Freddie’s profits, which investors had been hoping would be brought to an end as a result of these reforms.
While both institutions had received a combined total of $109.7 billion USD during the 2008 bailout, they have paid back another $181.4 billion USD in dividends to the Treasury on top of repaying the initial bailout. The full dividend sweep was implemented by the Obama administration in 2012 and replaced a 10% dividend that was originally part of the government bailout in 2008. What investors in FMCC and FNMA stock had been hoping for was a public offering on the Treasury’s 80% stake to generate enough capital for both institutions to function privately again.
Despite the negative market reaction to the reform plans, some analysts believe that the potential end to conservatorship presents “multiple winners.” Dick Bove of Odeon Capital Group said, “Everyone could make money here including the taxpayers, the United States economy, the housing industry, holders of GSE preferred issues, and possibly even the investors in the GSE common shares.” FMCC stock is currently valued at $2.57 while FNMA stock is at $2.71.
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