Fannie Mae and Freddie Mac Timeline
I have written about Freddie Mac (FRE) a few times recently after I purchased a small number of FRE shares in early July. The reason for making the purchase was that I thought the two companies, as government sponsored enterprises, are too big to fall. At one time, I thought I was wrong of owning the stock, though only 16 shares, when words first came out the companies may need to be bailed out by the government as losses from their mortgage portfolios mounted. The stock of Freddie dropped to all time low to below $3 in late August and I took my chance again, adding another 38 shares of FRE at $2.77 on August 22nd. Last Wednesday, September 3rd, I sold those 38 shares at $5.43/share, making nearly 100% profit from the trade.
I am glad I got out (not entirely though because I still own 16 shares with Scottrade) before it’s too late.
Yesterday, as an owner of FRE stock, the worst thing that could happen did happen: the government is taking control of the two mortgage giants and common stock holders are the less protected (debit and preferred stock owners all come first)! Both companies will continue to operate under the control of Federal Housing Finance Agency, a new agency created 8 this summer to regulate Fannie and Freddie, and they will keep buying mortgage related securities, but FNM and FRE common stock owners, like me, will probably be left with nothing
Though both companies didn’t exactly fall as we have seen happening on other private companies, the two’s existence as shareholder owned entities may be over for the foreseeable future. I was talking about how bad things can be. Now, we know the worst can indeed happen, even at companies this size. To rescue the two companies, taxpayers may have to take up to $200 billion. So hopefully, the money spent to bail them out means at least lower mortgage rates.
The following is the timeline of Fannie and Freddie that I gathered from various sources (Wikipedia, Financial Times and Reuters). Not a very complete history, but shows what happened to these two companies.
- 1938: The Federal National Mortgage Association, also known as Fannie Mae, was founded as government sponsored enterprise to provide liquidity to the mortgage market;
- 1968: Fannie Mae was converted into a private corporation;
- 1970: The Federal Home Loan Mortgage Corporation, also known Freddie Mac, was founded to end Fannie Mae’s monopoly of the secondary mortgage market;
- 1971: Freddie Mac introduced first mortgage-related security;
- 2003: Freddie Mac admitted it underestated $5 billion of earnings and was fined $125 million;
- 2004: Accounting scandal emerged at Fannie Mae, resulting $6.3 billion restated earnings;
- 2004: Both companies were ordered to raise their core capital level by 30%, limiting their abilities to purchase mortgages;
- 2006: Top executives at Fannie Mae were accused of manipulating the company’s book to maximize their bonus;
- August 2007: Subprime mortgage triggered the current financial market crisis;
- March 2008: Both companies were given permission to add $200 billion into the mortgage market;
- July 2008: Congress authorized the Treasury Department to provide equity to Fannie Mae and Freddie Mac;
- August 2008: Shares of FNM and FRE plummeted amid rumors that the two companies may need to be rescued by the government. Stocks rebounded after the Treasury denied it planed provide capital to the companies;
- September 2008: Both Fannie Mae and Freddie Mac were taken over by the government and top management at both companies were dismissed.
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