Broker Check

What's the Fate of Fannie-Mae?

Howard Hook, CFP®, CPA, quoted in The Star-Ledger's business column, "Biz Brain," December 10, 2013

Question: I have some Fannie Mae shares as part of an IRA, and I am wondering what to expect if Congress passes legislation "winding it down over the next five years," which I’ve seen in reported in the news.      — Curious investor

Answer: The Brain wishes we had a crystal ball.

Normally when a company "winds down," it sells all its assets and uses the proceeds to pay any liabilities, said Howard Hook, a certified financial planner and certified public accountant with EKS Associates in Princeton.

"Whatever is left over is paid to the shareholders, although preferred shareholders are paid back before common stock shareholders," he said. "However, when the federal government is involved, all bets may be off."

Hook said recent news coverage of Fannie Mae suggests there may not be much left over for shareholders.

Exactly what this means for your portfolio depends on many issues.

First, you should determine how much of your IRA the Fannie Mae shares represent, said Jim Marchesi, a certified financial planner with Mill Ridge Wealth Management in Chester. "If you look at the majority of stock mutual funds and institutional stock-only accounts, the biggest positions in these portfolios rarely make up more than 2 to 6 percent of the account," he said. "So, if your IRA is $100,000, a reasonable amount to have in one stock would be around $2,000 to $6,000."

Now, Fannie Mae is a government-sponsored enterprise that was charted by Congress to help maintain the stability and liquidity of the mortgage market by providing funds to lenders and by issuing mortgage-related securities. After the 2008 housing bubble, Fannie Mae (and brother Freddie Mac) were taken into conservatorship (after a $187 billion government bailout) by the Federal Housing Finance Agency, Marchesi said. "Given Fannie Mae’s new structure, there is no guide book that spells out how the future of this relationship plays out," he said. "There are restrictions on how Fannie May can operate, which are quite different than past activity, with more checkpoints in place."

Through this, Fannie Mae’s intrinsic value, as well as its stock price, took a big hit, Marchesi said. It’s still a major player in the mortgage business, and it has produced good results with the resuscitation of the U.S. housing market, he said. "In the spring of this year, Fannie Mae’s stock price started moving, with fast-paced players buying and selling it at vigorous rates," he said.  

"The stock went over $4 per share from under $1 per share in a matter of weeks, then fell to under $2 per share in an even shorter period. It is currently around $2.80 per share."

Because of the change of structure of Fannie Mae, Marchesi said there is a direct reliance on the federal government to meet its obligations. He said this is different than a company that took a bailout, paid it back, and didn’t change its structure.

"Many feel that because Fannie Mae got bailed out with money from taxpayers, any upside should be shared with the taxpayers," Marchesi said. "The other interested parties — such as Fannie Mae preferred shareholders and shareholders of Fannie Mae stock — want a result that shares the recent success of Fannie Mae."

So the answer? There is no clear answer. You’ll have to keep monitoring the stock to determine if it’s a worthwhile holding for your portfolio.