Business

What If The Government Loosened Its Grip On Federal National Mortgage Association Fannie Mae (OTCMKTS:FNMA)?

Federal National Mortgage Association Fannie Mae (OTCMKTS:FNMA)

Federal National Mortgage Association Fannie Mae (OTCMKTS:FNMA), also known as Fannie Mae, and Federal Home Loan Mortgage Corp (OTCMKTS:FMCC), also known as Freddie Mac, have been under the control of the government since 2008 when they were bailed out. What that means is that shareholders in the mortgage companies do not see a profit. Instead, the companies funnel all their profits to the US Treasury, and that has been a subject of serious legal dispute between shareholders and government on opposing sides.

Fannie and Freddie are turning nearly $10 billion in dividends to the government in March from their profits in the December quarter, or 4Q16. Fannie posted a $5 billion profit in the quarter and said it will send $5.5 billion to the Treasury, while Freddie generated $4.8 billion in profit in the quarter and said it will funnel $4.5 billion in dividends to the government.

If the government didn’t have a tight grip on these mortgage giants, shareholders would have benefited from these hefty dividend payouts. Instead, the best shareholders can come to enjoy Fannie and Freddie’s success is to profit from appreciation in their stocks as has happened every time they reported strong earnings results.

Fannie gives Treasury $160 billion

Federal National Mortgage Assctn Fnni Me (OTCMKTS:FNMA) posted net income of $12.3 billion in 2016, bringing its positive net worth at the end of the year to $6.1 billion. In the first nine months of 2016, Fannie paid $9.6 billion in dividends to the government. Combining the newly declared dividend of $5.5 billion to be released in March, the company has sent a total of $160 billion to the government since it returned on its feet after being bailed out in 2008.

Strengthening the business

The management of Fannie has recently focused on strengthening the company’s business model, especially reducing risk to taxpayers. Similar efforts are being made at Freddie.

As such, the mortgage giants reported lower serious delinquency rates at the end of 4Q16. For Federal National Mortgage Association Fannie Mae (OTCMKTS:FNMA), single-family delinquency rate dropped to 1.2%, while Freddie reported delinquency rate of 1%. Nationwide single-family delinquency was 2.96% in 3Q16, according to the Mortgage Bankers Association data. The association’s 4Q16 data isn’t out.

Fannie and Freddie’s upbeat 4Q16 and 2016 results showing improving fundamentals in the housing market.

Stock movements

While shareholders may be sitting out of profits from Fannie, strong performance by the company coupled by hopes that investors may someday find a way to share in future profits could continue to lift the stock.

Shares of Federal National Mortgage Association Fannie Mae (OTCMKTS:FNMA), have risen more than 117% year-to-date and are up more than 110% over the last 12 months. Shares of Freddie, on the other hand, are up more than 100% for both year-to-date and the last 12 months.

I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 96 hours. All information, or data, is provided with no guarantees of accuracy.

About the author: Monica Gray has an undergraduate degree in Accounting and an MBA – earned with Honors. She has six years of experience in the financial markets and has been a securities analyst for the past two years.

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Monica has an undergraduate degree in Accounting and an MBA she earned - with Honors. She has six years of experience in the financial markets and has been an analyst for the past two years.

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