Fannie Mae stock: A gambler's bet
— -- A: One of the biggest stunners during the credit crisis was the implosion of mortgage finance company Fannie Mae.
This company, which was created by the government, was responsible for injecting fresh cash into the home loan market by buying mortgages from lenders. Fannie Mae, and sibling Freddie Mac would then hold the mortgages on their own books or package them as securities for sale to investors.
Fannie Mae was designed to foster home ownership, which is good for society. And Fannie Mae's participation in the home loan market helped ensure there's a market for mortgages to be bought and sold. The liquidity provided by Fannie Mae made lenders more willing to make loans and investors more willing to buy them.
All that sounds great. But one of the problems is that Fannie had more than one master. On one hand, it served the public interest by encouraging home ownership. On the other hand, it was a for-profit company with shareholders to satisfy and executives whose lavish bonuses were based on financial performance.
When housing prices fell, it became clear that Fannie Mae was paying a great deal of attention to its for-profit side. The company has had a string of accounting problems and ultimately was all but taken over by the federal government this year.
The problems at Fannie Mae have been disastrous for shareholders. Shares of Fannie Mae are down 98% this year and have become essentially worthless at less than a dollar a share.
Is the fall of Fannie Mae stock a gigantic buying opportunity? Will Fannie Mae clean up its act and return to its profitable ways while being more prudent? Not so fast, according to a stock report from Standard & Poor's.
S&P rates the stock a hold, largely due to tremendous uncertainty of government's future actions. It's been clear that the government's objective is to stabilize the housing market, not protect Fannie Mae shareholders. S&P also expects the pace of foreclosures to remain high, putting further pressure on Fannie Mae.
