Fannie and Freddie Keep Soaring: Financial Winners

NEW YORK ( TheStreet) -- Fannie Mae ( FNMA) and Freddie Mac ( FMCC) on Wednesday were once again the big winners among major U.S. financial companies.

Shares of Fannie Mae rose 50% to close at $1.08, following a 38% increase on Tuesday. Shares of Freddie Mac were up 54%, also closing at $1.08, building on Tuesday's 35% gain.

Fannie and Freddie were taken under government conservatorship by the Federal Housing Finance Agency (FHFA) in September 2008. The shares of both companies have been on fire since The Wall Street Journal called attention to a filing last Thursday, when the company said it would delay filing its annual 10-K report to the Securities and Exchange Commission.

Under normal circumstances, a delayed filing would be bad news. However, Fannie said it would use the extra time to analyze whether it could recapture some of its $61.5 billion valuation allowance for deferred tax assets (DTA), as of Dec. 31. The eventual recapture of that money would recapitalize the company and go a long way toward redeeming $116.1 billion in preferred shares held by the U.S. Treasury for bailout assistance to the company.

Fannie reported a third-quarter profit of $1.8 billion, which was the company's third consecutive profit. Earnings for the first three quarters of 2012 were $9.7 billion, compared to a net loss of $14.4 billion during the first three quarters of 2011. The company paid a total of $28.5 billion in dividends to the Treasury as of Sept. 30.

Freddie Mac filed its 2012 10-K, on Feb. 28, reporting that its DTA valuation allowance was $31.7 billion as of Dec. 31. The government held $72.2 billion in Freddie Mac preferred shares at the end of 2012. Freddie earned $11 billion during 2012, improving from a loss of $11 billion in 2011. The company paid $7.2 billion in dividends to the Treasury during 2012, for a total of $23.8 billion in dividends paid since the company was taken under conservatorship.

With both companies now profitable, and possibly seeing light at the end of the bailout tunnel, even their preferred shares were hot, despite having dividend payments suspended since September 2008.

Fannie's preferred series E shares, with a coupon of 5.10% and a par value of $50, were up 34% to close at $6.99. Freddie's preferred series Z shares, with a coupon of 5.375% and a par value of $25, were up 6% to $3.20.

Still, the future of the two companies is still quite uncertain, as neither Congress nor President Obama have settled on a way forward for the U.S. housing market.

"Having 90% of all mortgage loan originations backed by Fannie and Freddie is a bad thing," according to Kevin Petrasic, a partner in the Global Banking and Payments Systems practice of Paul Hastings in Washington. Then again, a radical change in the mortgage finance market would be extremely risky in the midst of a fragile economic recovery.

"One of the central concerns from a macro perspective of FHFA is trying to make sure that the solution for Fannie and Freddie allows for a continued stable housing market," Petrasic says.

So investors can expect this story to play out over a period of many years. Meanwhile, some day-traders are making a killing on Freddie and Fannie common shares. Investors who go in for the preferred shares, hold them for an extended period and then have the good fortune of having the dividend payments resume, will be in for quite a bit of gravy some day.

More Happy Money From the Fed


Investors were quite pleased with the statement from the Federal Open Market Committee (FOMC), saying the Federal Reserve would continue making monthly purchases of $85 billion in long-term securities in an effort to hold long-term rates down.

The Fed has kept the short-term federal funds in a range of zero to 0.25% since late 2008. The FOMC once again said it expected the central bank's "highly accommodative" policy to remain appropriate as long as the U.S. unemployment rate remains above 6.5%, assuming inflation is kept in check. The Labor Department on March 8 said the unemployment rate improved to 7.7% in February from 7.9% in January.

The FOMC also said that, since its last meeting in January, economic data "suggest a return to moderate economic growth following a pause late last year."

The broad indices saw solid gains. The KBW Bank Index ( I:BKX) was up 0.5% to close at 57.12, with all but three of the index components rising for the session.

-- Written by Philip van Doorn in Jupiter, Fla.

>Contact by Email.

RELATED STORIES:





Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for TheStreet.com Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.

More from Investing

Goldman Will Pay Big Money for Cash -- Yes, Even Your Measly Savings

Goldman Will Pay Big Money for Cash -- Yes, Even Your Measly Savings

18 Auto Stocks Trump Just Ran Over With His Tariff Plan

18 Auto Stocks Trump Just Ran Over With His Tariff Plan

Tesla's Battery Tech Is Unrivaled

Tesla's Battery Tech Is Unrivaled

Future of Fast Food: Wendy's CEO Dishes

Future of Fast Food: Wendy's CEO Dishes

Merrill Lynch Agrees to Admit Wrong-Doing in SEC Case

Merrill Lynch Agrees to Admit Wrong-Doing in SEC Case