Thursday, August 14, 2008

Buy Fannie Mae

Back in 1938, with the nation reeling from a long and deep economic depression, Congress deemed home ownership to be a national priority. The Federal National Mortgage Association, or Fannie Mae (FNM on the New York Stock Exchange), was established to buy Federal Housing Administration-insured mortgages from commercial banks, thereby replenishing the supply of cash banks could lend.

Able to pass on risk (housing prices don't always go up), commercial banks were willing to lend a lot more of their capital and their depositors funds with real estate as collateral. More people got loans and houses. The economy improved.

The plan worked so well that in 1968 Congress expanded Fannie Mae's role. By joining with banks and other commercial lenders to create new mortgage products, and by expanding traditional government loan limits, Congress sought to increase the availability and affordability of homeownership for low-, moderate-, and middle-income Americans.

Conservatives objected strongly at the time, and so, as a compromise, to keep Fannie Mae's debt off the federal books, Fannie Mae was made private. That is, capital was raised from the public (chiefly its bank customers), and the Federal National Mortgage Assn. became a public traded stock. Congress maintained considerable control, however, and made sure the company had virtually unlimited access to the U.S. Treasury in case of economic turmoil.

Well, guess what. If you own a trillion-dollar pool of mortgages, insured or uninsured, every downtown in home prices creates economic turmoil. A bank's capital can get wiped out if loans drop 10% in value and it's forced to sell or mark the assets down on the bank's books. Because of its government-sponsored purpose, and it's Treasury backing, Fannie Mae is only required to maintain capital of 1%. Every housing blip makes FNM potentially insolvent. Any downturn brings out the critics.

But Fannie's not like other lenders, folks. It's not like other stocks. This company has a government sponsored purpose and charter. And it's not going to fail or have it's equity wiped out because of a downturn in home prices. It hasn't the last five economic downturns.

That's our opinion. About one million short-sellers take an opposite view. They say Fannie Mae is broke, worthless, soon to be bankrupt. Looking at the chart, I can understand if you think I'm crazy and they're right. If this company is backed by the government, how come its stock is now under $8 a share?

Good question. And there's no real answer, except that housing sucks, the credit market is in turmoil, Fannie's losing money (it has before), and fear is rampant. And just like they have in the past, conservatives are screaming for a national takeover of Fannie and other government-sponsored agencies that help our lending institutions manage risk.

I say Congress keeps Fannie Mae as a stockholder-owned institution, and that Fannie lives to earn $4 a share in 2011. Within the first hour of trading this morning, we're selling our DISK and putting what little hot tip money we have left into Fannie Mae common stock. Wish us luck.

(As a disclaimer, please remember I am a fictional stockbroker. You can sue me, but I probably won't show up in court, and I definitely don't have any money. PLAIN ENGLISH: If you buy this tip, you are on your own!)

MORNING UPDATE, 11:45 am: In the Hot Tip Account, we sold 2,000 Image Entertainment (DISK) @ an average of $1.26, and bought 360 shares of Federal National Mortgage (FNM) at $7.77. We also have a whopping $155 now in cash. Our Hot Tip account is down roughly 70% this year.

Thanks to E-Trade for the charts and dates.


Commercial Loans and Capital said...

If you own a trillion-dollar pool of mortgages, insured or uninsured, every downtown in home prices creates economic turmoil.
Commercial Loans and Capital

corkface said...

Your 4.00 eps is out of line. fnm has srunk is underwriting portfolio and have left the alt-a business scheduled in jan09. they will certainly continue to do business but the volume of acceptable loans that can get thru underwriting will hurt their earning potential. they might hide under the skirt of the govt but the 2.6 bil loss last qtr is just the start of the losses that are coming down the line. this common stock could be in trouble but the bonds will survive. the question is, where is the bottom in house prices? Forclousures will not peak until deep into 09 and that should cause the supply to rise. with the standards that have been set in current underwriting acceptance, the demand side of the equation (buyers) will not be able to catch this falling knife. doom and gloom has always been a great opportunity for future gains, but capitulation is the time to buy. It ain't here yet.

Austin Carr said...

On the $4 per share: I hope I'm half right.

corkface said...

I just dropped off a better idea than the fnm. MBI!!!!!! read it, if TFA will let you see it. Makes more money in the next 2 qtrs than fnm and fre combined.