Fannie Mae and Freddie Mac: Let the Pros Mix It Up


Stocks were, practically speaking, unchanged today. Strictly speaking, however, they did manage to eke out a small gain, with the S&P 500 gaining 0.02%, to post its fifth winning day consecutively. The narrower, price-weighted Dow Jones Industrial Average gave back 0.06%.

The CBOE Volatility Index (VIX) , Wall Street's "fear index," fell another 1% to close at 14.21, its lowest closing level since May 24. (The VIX is calculated from S&P 500 option prices and reflects investor expectations for stock market volatility over the coming 30 days.)

Do you really want to have to fight for your dividends?
Respected value-oriented mutual fund manager Fairholme Funds is suing the government regarding its stewardship of mortgage finance giants Federal National Mortgage Association and Federal Home Loan Mortgage Corporation , commonly known as Fannie Mae and Freddie Mac. Earlier in the week, it emerged that a group of investors led by Perry Capital, one of the largest hedge funds, is also suing the government.

Both fund managers have the same complaint: The government, which owns nearly 80% of both companies after having provided $187 billion in taxpayer support to prevent their collapse, has modified the terms of the bailout in a way that leaves minority shareholders hungry. Previously, Fannie and Freddie were paying a quarterly dividend of 10% to the government; however, the U.S. Treasury has removed that "cap" and is now appropriating for itself the bulk of the firms' profits in dividend payments.

With the mortgage giants achieving profitability in 2012 for the first time since the onset of the credit crisis, their shares have attracted enormous interest. A lot of investors have rushed in to own a claim on those profits -- as this year's massive run-up demonstrates:

FNMA Chart
FNMA Chart

FNMA data by YCharts

Don't let visions of triple-digit returns draw you in like a siren song. These shares are extraordinarily volatile, and it's not all on the upside. In the one-month period since I first mentioned them, the peak-to-trough loss in Fannie Mae shares has been almost 50%, if we use intraday prices (even on the basis of closing prices, the equivalent loss is 40%).

From on observer's perspective, this is a fascinating case study -- the sort of special situation in which professional investors really earn their "alpha," or excess returns (and their fees). Conversely, individual investors have absolutely no business playing in this arena, unless that's all they're doing -- playing (i.e., taking a punt with "casino money").

There are simply too many other less exciting -- but more dependable -- ways to make money in the stock market. Earning dividends that are unencumbered by the federal government, for example -- that's an idea! To that effect The Motley Fool has compiled a special free report outlining our nine top dependable dividend-paying stocks. It's called "Secure Your Future With 9 Rock-Solid Dividend Stocks." You can access your copy today at no cost! Just click here.

The article Fannie Mae and Freddie Mac: Let the Pros Mix It Up originally appeared on

Fool contributor Alex Dumortier, CFA, has no position in any stocks mentioned; you can follow him on LinkedIn. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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Originally published