Fannie Mae, Freddie Mac Shares Continue to Plummet on Bipartisan Reform Bill

NEW YORK ( TheStreet) -- Shares of Fannie Mae ( FNMA) and Freddie Mac ( FMCC) continued to sink Wednesday, as the fate of common shareholders who were wiped out during the 2008 bailout of the housing giants remains uncertain.

On Tuesday, Tennessee Republican Senator Bob Corker and Virginia Democratic Senator Mark Warner introduced a plan to replace Fannie Mae and Freddie Mac with a new system where private capital absorbs most of the risk, while the government acts as a reinsurer.

The proposal contemplates a five-year window to wind down the government sponsored enterprises or GSEs and their regulator the Federal Housing Finance Agency.

During this time, there will be no changes to the Preferred Stock Purchase Agreement between the GSEs and the Treasury. Essentially, the agencies will continue to sweep the bulk of their profits to the Treasury in the form of dividends.

Upon wind down, proceeds from the liquidation will be paid first to senior preferred shareholders -- Treasury--, then to junior preferred shareholders and, finally, common shareholders.

FBR Capital analyst Edward Mills said in a note Wednesday that he believes the terms are structured in such a way that the "economic value" from the liquidation will not flow beyond the senior preferreds. In other words, common shareholders, who figure last in the list of who gets repaid, will likely get nothing, according to the analyst.

If the legislation passes, it crushes any hopes shareholders may be harboring of the companies being restructured and returned to private hands.

Shares of Fannie Mae were down more than 31% in Wednesday trading at $1.07, extending a 13% decline on Tuesday. Shares of Freddie Mac were shedding 28% to $1.07.

Year-to-date, shares of Fannie Mae are still up 430%, while Freddie Mac is up 315%.

Fannie's preferred Series S shares (FNMAS), with a face value of $25, were down 10.7% at $4.41 Wednesday afternoon. Fannie's preferred Series E shares (FNMFM), with a face value of $50, were plunging 16.5% to $8.76.

Freddie Mac's preferred Series Z shares (FMCKJ), with a face value of $25, was down 8.8% to $4.65.

The legislation, which was co-sponsored by six members of the Senate Banking Committee, marks the first step the government has taken towards reform of the housing giants since they were taken into conservatorship in 2008.

Both sides of the government have frequently expressed a desire to reform the GSEs, which now play an outsized role in the mortgage market. The agencies back more than 80% of the new mortgages originated today and guarantee more than 60% of the overall mortgage market. That puts taxpayer money at risk.

However, there is considerable disagreement on what the future housing finance system should look like. Some on the right believe the government should completely exit the mortgage market and that the presence of any kind of guarantee, even if explicit, will make the system unstable.

Others believe that there should be some kind of government backstop, but that the guarantee should be made explicit, so that taxpayers are at least compensated for the risk.

Under the new legislation, Fannie Mae and Freddie Mac will be replaced by a new government agency called the Federal Mortgage Insurance Corporation. The agency will collect premiums from the industry. In the event of a crisis, the FMIC will act as a backstop, stepping in to insure investors from losses but only after private capital has absorbed 10% of the security losses.

"When you've got a 10 percent capital buffer in advance it really causes that pricing of risk to be far less important because what you have out there is a huge investment by the private sector in advance of any kind of government reinsurance and that ought to be soothing to taxpayers," Corker said at the news conference, according to Bloomberg.

The bill also removes the affordable housing goals of the GSEs and instead establishes a Market Access Fund that will collect fees to maintain access to housing, provide grants to state housing agencies and conduct borrower counseling program.

This should curry some favor with conservatives as well.

Still, analysts believe the bill would struggle to pass in the Republican-controlled House, where conservatives are expected to argue for a completely private housing finance system.The Senate Banking Committee also has expressed a desire to reform the Federal Housing Administration first.

And others are also working on alternate proposals to restructure Fannie Mae and Freddie Mac.

Which means, the debate is likely to continue and shareholders may be stuck in limbo for a while.

-- Written by Shanthi Bharatwaj New York.

>Contact by Email.

Disclosure: TheStreet's editorial policy prohibits staff editors and reporters from holding positions in any individual stocks.

If you liked this article you might like

Worst-In-Class Goldman Sachs CEO Blankfein Gets 9% Pay Raise

Worst-In-Class Goldman Sachs CEO Blankfein Gets 9% Pay Raise

House Financial Services Chairman Jeb Hensarling Won't Seek Reelection

House Financial Services Chairman Jeb Hensarling Won't Seek Reelection

Mortgage Payments Could Be Hurt by Harvey's Impact on Houston

Mortgage Payments Could Be Hurt by Harvey's Impact on Houston

Fannie Mae: 36,583 Homes it Covers are in Harvey's Path

Fannie Mae: 36,583 Homes it Covers are in Harvey's Path

Fannie Mae and Freddie Mac Would Be Privatized Under Proposed House Budget

Fannie Mae and Freddie Mac Would Be Privatized Under Proposed House Budget