Fannie and Freddie – Grounded at Last

Fannie Mae [FNM] and Freddie Mac [FRE] announced yesterday they’ll be delisted from the NYSE for failure to meet listing requirements. It’s about time.

These two quasi government entities collapsed along with home prices starting in 2007 and have no chance of recovery to profitability. Around year-end 2009 FNM had a negative net worth of $94.05 /share while FRE was even further in the hole with a negative book value of $117.74 /share.  After huge Q1 losses they had a combined negative equity of about $147 billion and had to tap American taxpayers for billions more in ‘loans’ that will never be repaid.

President Obama says these two organizations are necessary to the country because they account for a huge percentage of all mortgages. He has ordered them to offer mortgage modifications to prevent foreclosures even if it means taking enormous write-offs of principal. Neither company has a goal of turning a profit or even getting to break-even. They are now merely conduits to funnel the collective tax payments of successful, contributing members of society to those who have failed to live properly funded lives.

In reality, mortgages that have a good chance of being paid back would be eagerly issued by private banks and S & Ls anyway. Poor risk mortgages and/or reworked loan modifications that are likely to re-default should not be made by FNM, FRE or anybody else simply to artificially support the housing market. Until we let housing prices fall to “clearing” levels we will never see a sustainable rally in home values.

Politicians always clamor for keeping home prices high while ignoring the fact that lower costs would actually make home buying more affordable to those seeking to buy and for others who would invest in properties as rental units if the purchase prices were low enough for positive cash flows.

Similarly, the FED’s setting of interest rates at near-zero levels is designed to subsidizebad-acting banks and borrowers while penalizingthose who actually saved and invested.

FNM and FRE showed trailing 12- month per share losses of ($11.31) and ($7.16) respectively. Here are the sad 5-year charts from Barney Franks’ “let’s roll the dice” losers…

Amazingly, both FNM and FRE have been trading huge daily volumes by day traders who care only about stock price movement and nothing about the value of the underlying shares.  FNM has a 52-week range of $0.41 – $2.13 and FRE showed a range of $0.52 – $2.50 /share.

Knowing the fundamentals of these fine firms who were the buyers? Delisting these shares at least takes some of the idiots out of the game of trading less than worthless companies.

Both FNM and FRE should be systematically liquidated in the same way failed FDIC banks are handled. Sell off the securities held or hold them in run-off status. Make no more loans to anyone. Stop buying securitized loans from others. Stop the bleeding and leave the business of mortgage lending exclusively to the private sector.

Dr. Paul Price

www.BeatingBuffett.com

June 17, 2010