Fannie Mae, Freddie Mac plunge on MBA's proposed overhaul

Posted Sep 2nd 2009 12:00PM by Elizabeth Harrow
Filed under: Federal Natl Mtge (FNM), Options, Financial Crisis

If you're wondering why Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE) have been bombarded by selling pressure today, look no further than this Wall Street Journal article (subscription required). The newspaper reports that the Mortgage Bankers Association (MBA) is pushing for the government to split up Fannie and Freddie "into several smaller privately held companies that would issue mortgage related securities carrying an explicit government guarantee."

Under the terms of the proposal, Fannie and Freddie's offspring would no longer be permitted to sit on massive mortgage portfolios. Additionally, all mortgage-backed securities created by the duo would be backed by a federal insurance fund, replacing the rather abstract implied government guarantee that's currently in place.

"If we're going to restore and maintain investor confidence and ... consistent liquidity, that is going to require an explicit backstop," explained John Courson, the chief executive and president of MBA. Vice Chairman Michael Berman added, "The government has an important, limited role to play to ensure a stable flow of funds for mortgages."

While the Obama administration is likely to consider a variety of options before determining the future for Fannie and Freddie, investors are reacting with pure anguish to today's news. Both stocks were down about 17% at last check, and the generally bearish bias to today's session is only exacerbating their losses.

Meanwhile, option players appear to be availing themselves of plunge protection, at least where FNM is concerned. Put volume on the equity raced to nine times the norm within the first hour of trading, and 17,063 contracts traded on FNM's September 1 put. With volume at this strike outpacing open interest of 16,499 contracts, it's a safe bet that new positions are being added here today.

Elizabeth Harrow is an analyst and financial writer in the research department at Schaeffer's Investment Research. She is featured in the video series Schaeffer's Daily Q&A on SchaeffersResearch.com.

Tags: Fannie Mae, FNM, FRE, Freddie Mac, inthenews, John Courson, MBA, Michael Berman, Mortgage Bankers Association, options

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Reader Comments (Page 1 of 1)

9-02-2009 @ 12:22PM

Jamie Samans said...

"...investors are reacting with pure anguish to today's news."

Investors? There are no Fannie and Freddie investors. There are traders, and the shares going down doesn't necessarily tip their fortunes.

Moreover, the drop today is not because of the Mortgage Bankers Association, the one group that the Obama administration is unlikely to see as holding much weight given its role in the crisis. The drop is a natural continuation of yesterday's drop, and a lack of confidence to bid the stock higher.

It may go up. It may go down. But MBA has little to do with it. When people trade a stock with no guaranteed value, they're going to jitter.