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van Doorn: Fannie Mae Is a Government Cash Machine

It has been less than five years since Fannie Mae was taken under conservatorship, and because of the multiple draws from the Treasury, the government's preferred stake in the company has been less than the current $117.1 billion during this time. But if we base our dividend yield calculation on five full years and the entire $117.1 billion, the government's annual dividend yield on the Fannie Mae preferred shares has been 16.23%.

Not a bad investment, considering that the government managed to ensure the continued liquidity of the U.S. mortgage market, while eventually raking in a huge return.

While further DTA releases will be small ones, by the end of the year, assuming Fannie Mae remains as profitable as it was during the first quarter, the government will have earned dividends on its Fannie Mae investment close to or even exceeding its total investment, in just over five years.

No matter how much in dividends Fannie Mae manages to pay the federal government, there is no mechanism in place for Fannie to repurchase the outstanding preferred shares.

What About the Junior Preferreds?

Investors who hold junior preferred shares in Fannie Mae and Freddie Mac, which had their dividends suspended in September 2008, are hoping for a positive outcome after years of waiting.

The political discussion on the eventual fate of Fannie Mae and Freddie Mac continues in Washington. The prospect of a big payday junior preferred shareholders who scooped up those shares at heavy discounts is distasteful to some members of Congress, but there's no denying the two mortgage giants exist, they are quite profitable, and they are positioned to repay the government, if and when they are allowed to.

There may be various legal remedies for the junior preferred shareholders, over time.

Fannie's preferred series E shares, with a coupon of 5.10% and a par value of $50.00, closed at $7.75 on Wednesday, rising nearly fourfold from $1.60 at the end of 2012.

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