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Fannie and Freddie: A Chart and a Friend

Updated from 8:50 a.m. ET with volatile morning market action and additional comment from Rafferty Capital Markets analyst Richard Bove.

NEW YORK (TheStreet) -- Investors can expect another day of extreme volatility for shares of Fannie Mae (FNMA) and Freddie Mac (FMCC), amid mixed signals from Washington.

Fannie Mae's common shares on Tuesday dropped 30.8% to close at $4.03, while Freddie Mac's common shares were down 26.8% to close at $4.04, after Senate Banking Committee Chairman Tim Johnson (D., S.D.) Senator and Mike Crapo (R., Idaho), the ranking member of the committee, announced they had come to an agreement on a bi-partisan proposal to wind-down the mortgage giants.

Fannie's shares were down another 10% in early trading Wednesday to $3.63, while Freddie's common shares were down aother 13.4% to $3.50.

GSE junior preferred shares also also hit hard.  Fannie Mae's preferred Series S shares (FNMAS) were down 7.6% to $10.95, after pulling back 3.3% on Tuesday.  Freddie's preferred Series Z shares were down 7.8% to $11.30, after a 3.9% decline on Tuesday. Both issues have face values of $25, with investors hoping the junior preferreds will trade up to par if their dividends are restored.

Fannie and Freddie -- together known as the government-sponsored mortgage enterprises, or GSEs -- were taken under government conservatorship at the height of the U.S. housing market meltdown in September 2008. The GSEs' common and preferred stocks remained publicly traded, but values plunged because dividends to non-government shareholders were suspended, and because it appeared highly unlikely at the time at the GSEs would eventually return to being highly profitable.

Over the past year, many institutional and retail investors have ridden common and junior preferred shares of the GSEs to huge gains on what they consider to be a unique investment opportunity, during a long legal battle over government's treatment of private investors.

The government's original bailout agreement with the GSEs required Fannie and Freddie to pay the U.S. Treasury 10% annual dividends on the government-held senior preferred shares. However, in August 2012, after the GSEs had returned to profitability and after they had stopped increasing their borrowings from the government, the bailout agreement was changed so that all GSE profits were paid to the government, in excess of minimal capital cushions.

Following their March dividend payments, Fannie and Freddie will have paid total dividends of $199 billion on $189.4 billion in senior preferred shares held by the Treasury. Factoring in warrants that were handed to the government to acquire up to 79.9% of the GSEs common shares, Rafferty Capital Markets analyst Richard Bove on last week estimated the government's return on its investment in Fannie and Freddie was $238 billion.

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