Fannie and Freddie: Financial Winners

NEW YORK ( TheStreet) -- Fannie Mae ( FNMA) and Freddie Mac ( FMCC) were the big winners among major financial names, on an otherwise weak day for the stock market.

Shares of Fannie Mae were up 15% to close at $2.10, while Freddie Mac was up 20% to close at $2.00. The two mortgage giants together are known as the government-sponsored enterprises, or GSEs, and were taken under government conservatorship in September 2008.

Fannie's shares have returned 708% this year, while Freddie's shares have returned 669%, as both companies have shown very strong profits.

The very strong action for the GSEs on Thursday was apparently driven by strong housing numbers reported by their regulator, the Federal Housing Finance Agency. The FHFA on Thursday reported that U.S. home prices rose by 1.9% sequentially and 6.7% year-over-year, during the first quarter, which bodes very well for Fannie and Freddie.

Because of the massive bailout of the GSEs the U.S. Treasury holds $117.1 billion in Fannie Mae senior preferred shares and $72.3 billion in Freddie Mac senior preferred shares. After determining it would be able to recapture most of its valuation allowance for deferred tax assets (DTA) at the end of the first quarter, Fannie Mae announced on May 9 that it would pay the Treasury a second-quarter dividend of $59.5 billion.

The U.S. government's investment in Fannie Mae and Freddie Mac is paying off quite handsomely. Freddie is expected soon to recapture its DTA, setting up another special dividend, and no matter how much in dividends the GSEs pay to Uncle Sam, there is still no mechanism for either GSE to repurchase any government-held preferred stock.

Junior Preferred

Dividend payments on junior preferred shares of Fannie Mae and Freddie Mac were suspended when the GSEs were taken under conservatorship in September 2008, instantly sinking in price to pennies on the dollar.

But with investors seeing a possibility for life for the GSEs after a full repayment of the government bailout, the junior preferred shares have also rallied this year. After all, Fannie May had $3.2 trillion in total assets, while Freddie had $2.0 trillion in assets, as of March 31.

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