Freddie Mac (FMCC) stock and its counterpart, Fannie Mae (FNMA), have both been hot investments this year, up more than 200% each after the Trump administration indicated that it was considering a public offering for the two government-sponsored enterprises.
While there is considerable interest in a shift toward privatization for Freddie Mac and Fannie Mae, a red flag remains. Federal Housing Finance Agency director Bill Pulte took to social media to urge investors to “read the risks that Freddie Mac has in their 10-K” before investing.
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On the surface, that’s sound advice for anyone who is looking at opening a new position. But considering Pulte’s role in the government office that regulates Fannie Mae, Freddie Mac, and the Federal Home Loan Banks, the warning put an immediate damper on Freddie Mac stock. It dropped 10% last week following Pulte’s post.
Freddie Mac, which is also the name of the Federal Home Loan Mortgage Corporation, was created in 1970 to work with smaller banks to help banks finance long-term fixed-rate mortgages with low down payments. Similar to Fannie Mae, which was created during the Great Depression to work with major lenders, Freddie Mac’s role is to expand liquidity and give smaller lenders access to real estate sales.
Freddie Mac has a market capitalization of $6.6 billion, so it’s smaller than Fannie Mae. FMCC stock is up 231% so far this year, although it’s now trading 28% below its 52-week high.
Fannie Mae and Freddie Mac have been under government conservatorship since they needed government bailouts in 2008 when the housing bubble popped. Both companies had taken on risky loans and securities that included subprime loans and were in danger of collapse. Following billions of dollars in losses, Congress created the Federal Housing Finance Agency and placed them under conservatorship. The two organizations have paid billions of dollars in dividends to the U.S. government as part of the arrangement and are now profitable.
Companies—and enterprises like Freddie Mac that trade on the New York Stock Exchange—annually file a 10-K report that includes financial statements, risk disclosures, management commentary, and legal issues.
Fannie Mae and Freddie Mac have paid billions in dividends to the U.S. government as part of the conservatorship—more than they received as part of the bailout, in fact—and are now profitable.
