Investments Lending

Fannie, Freddie stock plummets after court decision dents shareholders' prospects

But still trading above pre-election totals

US economy

Shares of Fannie Mae and Freddie Mac went into free fall on Tuesday after the U.S. Court of Appeals for the District of Columbia Circuit ruled that Fannie and Freddie shareholders cannot pursue many of their claims related to the so-called “Third Amendment sweep.”

Each of the government-sponsored enterprises’ stock fell by more than 40% in the immediate aftermath of the court’s ruling being released, before recovering slightly by the end of the day’s trading.

Shares of Fannie Mae opened at $4.19 on Tuesday, before falling to as low as $2.55 at 11:25 a.m. Eastern.

The stock rebounded slightly over the course of the day, closing down 34.7% for the day (as shown in the graph below). Overall, Fannie shareholders saw their shares drop by $1.44 to $2.71 per share.

 

The story was the same for Freddie Mac.

Freddie Mac opened trading at $4 but fell to as low as $2.36 at 11:25 a.m. Eastern.

Freddie’s stock rose back up a bit, but not as much as Fannie’s did.

Freddie closed down 38.1% for the day, falling by $1.52 to $2.47 per share (as shown in the graph below).

 

Despite the drop, both Fannie and Freddie are still trading above where they were prior to the election of President Donald Trump, which brought increased enthusiasm among shareholders that releasing the GSEs from conservatorship may be in the offing.

As the GSEs are currently structured, the government owns the senior preferred stock in each, with the junior shares still trading on the over-the-counter market.

If GSE reform does indeed happen, the junior shareholders could cash in, especially those who bought Fannie and Freddie at the bottom, at around $0.20 per share in 2010.

As shown in both of the graphs above (just click on the “90 day” tab), both Fannie and Freddie were trading around $1.60 per share prior to the election.

Both stocks rose immediately after the election.

But that rise wasn’t anything compared to the events of Nov. 30, which saw both stocks skyrocket to prices not seen since the middle of 2014.

That increase was driven by Steve Mnuchin, now the Secretary of the Treasury, who said during an interview that “getting Fannie and Freddie out of government ownership” is one of the Trump administration’s top 10 priorities.

Recently, the Trump administration reiterated that GSE reform is top priority. And if that happens, then Tuesday’s stock drop will be easily forgotten.

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