Rising Fannie Mae Stock Could Be Signaling Doubt On Government-Sponsored Enterprises Reform

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WASHINGTON (MNI) - Fannie Mae and Freddie Mac stock has recently seen a resurgence after being long thought dead, but as Congress has failed to seriously take on housing finance reform, the market may be signaling that they don't think the GSEs are going anywhere.

Shares of the two mortgage giants shot up on March 13, after being dormant for years, as Fannie Mae said it was delaying its annual 10-K filing because it needed more time to value tax deferred assets but said that "regardless of the decision to release or not release the valuation allowance, we expect to report significant net income for the three months and the year ended December 31, 2012."

There is no question that the housing market is on the mend, and it now appears Fannie and Freddie are once again making money. While the two mortgage giants still owe the U.S. Treasury nearly $200 billion for funds that were provided as part of the tax payer bailout the revenue stream they are generating could be a tempting "piggy bank" for a cash strapped federal government.

The temptation is strong enough that four senators proposed legislation the day after Fannie Mae's statement that would prohibit increases in agency guarantee fees to offset government spending. The senators said that if the money being generated by the increase in fees were to be allocated to fund other spending it would be nearly impossible to reform Fannie and Freddie.

While it seems unlikely that shareholders of Fannie Mae and Freddie Mac stock will ever see a dime because the U.S. Treasury owns Senior Preferred Shares which it acquired as part of the tax payer bailout and the two companies are still in conservatorship, if the enterprises continue to generate income (Freddie Mac reported $11.0 billion in net income in 2012 and Fannie Mae promises "significant net income") and Congress fails to ever dissolve the mortgage giants, it is not inconceivable that the preferred and common shares owned by the general public could one day be worth something.

Until Congress figures comes up with a solution or housing finance alternative to Fannie Mae and Freddie Mac it remains uncertain what will become of the two companies or if they will ever actually be dissolved. At this point, the idea garnering the most attention is a government entity that acts as a catastrophic insurer.

Meanwhile, the Federal Housing Finance Agency, which acts as the conservator of Fannie and Freddie, is combining their securitization platform into a separate entity that will be completely independent. Would common share holders of Fannie and Freddie have a claim to either of those?

The question remains unknown, and the longer it takes for a real solution the more doubt that there will ever be reform. The recent uptick in Fannie and Freddie shares could a bet on a cheap stock that could pay off later but it could also viewed as a against Congress ever coming up with a real solution.

--MNI Washington Bureau; tel: +1 202-371-2121; email: imckendry@mni-news.com

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