On Sunday, September 7, 2008, U.S. Treasury Secretary Henry Paulson announced a comprehensive plan to place the two largest GSEs (Fannie Mae and sister company Freddie Mac) under "conservatorship", or temporary control of the U.S. government. The government will fund and operate Fannie for the immediate future, though a return to private operation is possible.
On Wednesday, August 27, Fannie Mae announced a shakeup of its upper-level management in the face of rising concerns about a potential government bailout. Among the changes were replacements of Fannie's chief business officer, chief risk officer, and chief financial officer.
After the U.S. Treasury announced that it had gained Congressional approval to essentially bail out Fannie Mae and Freddie Mac if needed, worried investors punished the two companies' shares. The fear is that an infusion of capital from the U.S. government would dilute existing shareholder value to the point of wiping it out entirely.
On July 15, 2008, the SEC enacted a temporary rule limiting the ability of traders to short shares of Fannie Mae and Freddie Mac. The new rule, to be in effect for 30 days, requires that traders to actually hold shares of the two companies before short selling them. This prevents what's known as "naked short-selling", where traders never actually borrow and sell the shares involved.
A Lehman Brothers analyst reported on July 7, 2008, that an accounting change could force Fannie to add $46 billion of capital to its balance sheet. Investors also worried about future write downs, sending Fannie's stock down as much as 20% during the day. (1)
Fannie Mae announced its fourth-quarter and full-year results from 2007 on February 27, 2008. For the year, net revenues were down 7% to $10.9 billion, and Fannie reported a net loss of nearly $2.1 billion for the year. Fourth-quarter results were largely responsible for the drag on the year's performance; Fannie lost $3.55 billion in the fourth quarter, a record. Fannie officials say that most of the losses stemmed from their belief that falling interest rates would cause mortgage values to rise once again, which failed to happen in the fourth quarter.
The value of its mortgage portfolio jumped by an annualized rate of 17.3% in October, said Fannie Mae on November 30. A $7.1 billion purchase of a credit facility from Lehman Brothers drove the increase. The cost of insuring Fannie's debt dropped 7 basis points as a result.
The cost of insuring debt issued by Fannie Mae in the case of default rose around 7.6% on Tuesday, November 20, to about 58.75 basis points. This news came on the heels of a $2 billion third-quarter loss at Freddie Mac.
After a report from Fortune magazine that Fannie Mae has changed the way it accounts for bad loans on its books, Fannie's stock price fell to its lowest level in ten years. The report helped fuel concerns that the mortgage giant may be downplaying losses related to the subprime fallout, driving investors to sell. A conference call on Friday, November 16th, failed to fully calm investors' and analysts' fears about Fannie's exposure to bad loans.
On Friday, November 9, Fannie Mae reported its results from the third quarter of 2007. In the report, Fannie announced a $1.39 billion net loss for the quarter, largely due to devaluations of $2.24bn on derivative contracts and $1.2bn on its $2.7 trillion in mortgage assets that it either owns or guarantees.
On Wednesday, November 7, New York Attorney General Andrew Cuomo announced that he was subpoenaing Fannie and Freddie Mac as part of an investigation involving an alleged plan to inflate home price appraisals. Though he said that he wasn't planning to list Fannie and Freddie as defendants in a lawsuit, the negative publicity drove down their stock prices nonetheless.
Fannie Mae and Freddie Mac (FRE) saw their stock prices rise significantly after they asked on Aug 6, for an increase in the amount of mortgages they could hold in their portfolios. On Aug 8, the U.S. Housing and Urban Development Secretary that he was considering the increase, which would allow Fannie and Freddie to hold more mortgages (earning the interest on those mortgages). The move would give some liquidity to the ailing mortgage industry, and a decision is expected soon.
Citigroup (C) released a statement that estimated Fannie Mae's and Freddie Mac (FRE)'s unrealized losses due to the subprime bust at up to $4.7 billion. Despite this, Citi said that the two were well positioned to weather the mortgage meltdown; considering their combined mortgage exposure of around $3 trillion, the potential maximum losses of $4.7 billion between the two are quite small when looking at the big picture.
Concerns about the economy and the U.S. housing market sent stocks down around the world, led by financial companies such as Fannie Mae.
A report showing that US Housing sales would reach a 6-year low in 2007 depressed Fannie's stock price from $66.96 to $63.96. A reduction in sales means that there is less of a demand for mortgage, which means that Fannie ultimately earns less per dollar lent.
Fannie's stock climbed from $64.37 to $68.75 in response to a judge dismissing a class action lawsuit against Fannie. The lawsuit, brought by share holders, sought to coerce Fannie into attempting to recover bonuses paid to fraudulent former executives.
Stock price jumped $3.59 as Fannie Mae released two pieces of favorable news: profits were up 26% in 2005, relative to 2004, and the Chief Financial Officer resigned. He had been involved in Fannie's accounting scandals.
Concerns about the subprime lending bust seemed to ebb for a while, resulting in a sharp increase in the number of government agency bonds (including Fannie Mae's mortgage-backed securities) sold in April versus those sold in March. Stocks for various mortgage companies rose on this news as confidence (briefly) returned to the industry.
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