This Day On The Street
Continue to site
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

Wall Street Journal Misses Fannie Preferred Point

NEW YORK ( TheStreet) -- The government is going to make a lot of money on its investments in Fannie Mae (FNMA) and Freddie Mac (FMCC) and junior preferred shareholders may eventually get in on the gravy.

In a Heard on the Street article Wednesday, the Wall Street Journal rightly said, "there is no plan, or mechanism, in place" for the company to repurchase $117.1 billion in preferred shares held by the government. But the Journal misses the point that investors in junior preferred shares of Fannie and Freddie may be see a huge payoff over the long term.

Fannie Mae on Tuesday reported record profits for the fourth quarter and for all of 2012, and said it could see a potential $58.9 billion windfall from the recapture of its valuation allowance for deferred tax assets (DTA), as early as the first quarter.

Fannie Mae's shares rose 13% on the news, closing at 90 cents on Tuesday. Sister mortgage giant Freddie Mac saw its shares rise 14% to close at 87 cents. Both Fannie and Freddie -- collectively known as the government sponsored mortgage enterprises -- were taken under government conservatorship at the height of the real estate crisis in September 2008.

Under its initial agreement with its regulator, the Federal Housing Finance Agency and the U.S. Treasury, Fannie Mae agreed to pay quarterly dividends at an annual rate of 10%, even if it failed to turn a profit, which forced the insolvent company to make multiple draws from the Treasury in order to continue operating and cover the dividends. Then in August 2012, after Fannie posted profits for the first and second quarters, the agreement with the Treasury was amended so that beginning in 2013, the company would no longer pay a 10% dividend on the government-held preferred, but instead would pay an amount based on the company's "net worth as of the end of the immediately preceding fiscal quarter."

Fannie Mae is now, essentially, paying all of its profits to the Treasury, while maintaining a "capital reserve" of $3 billion, which declines by $600 million a year, until it reaches zero in in 2018.

If and when the company recaptures some or all of the $58.9 billion DTA, that amount will be added to the previous quarter's profit, less the capital cushion, for a large dividend payment to the government.
1 of 3

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Real Money

More than 30 investing pros with skin in the game give you actionable insight and investment ideas.

Product Features:
  • Access to Jim Cramer's daily blog
  • Intraday commentary and news
  • Real-time trading forums
Only $49.95
14-Days Free
14-Days Free
FMCC $1.57 -0.70%
FNMA $1.71 0.00%
AAPL $95.03 -2.90%
FB $116.73 7.20%
GOOG $691.02 -2.10%


Chart of I:DJI
DOW 17,830.76 -210.79 -1.17%
S&P 500 2,075.81 -19.34 -0.92%
NASDAQ 4,805.2910 -57.85 -1.19%

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs