It’s official. It what was the worst kept secret on Wall Street Friday after the market closed, the government finally bailed out beleaguered mortgage giants Fannie Mae (FNM, $7.04, up $0.62) and Freddie Mac (FRE, $5.10, up $0.15) on Sunday in a move that came much sooner than anyone anticipated. The government’s seizure of Fannie and Freddie could cost U.S. taxpayers nothing or it could cost us $200 billion.
As far as the stock for both companies, the common and preferred shares will still trade but the dividends have been suspended. The shares for both Fannie and Freddie will still trade but both stocks are likely headed below $5. We can expect a ton of class action lawsuits but the move was done to help the U.S. housing market and stabilize the market.
Fannie and Freddie own or guarantee almost half of the country’s $12 trillion in outstanding home mortgage debt and the news is great for would-be homebuyers and homeowners looking to refinance. Mortgage rates are expected to drop from 6.35% to under 5.5% or lower which should attract more potential buyers into the market and hopefully stabilize housing prices. There will be many if’s ,and’s or but’s from here on out and this doesn’t mean we are in for smooth sailing.
What it does mean for us though is that there won’t be anymore option trades on these two companies coming from this corner. I look for the market to have a pretty decent rally on Monday but it remains to be seen if it will be able to hold onto any gains that may come from them. “Relief” rallies are nice but they often fade quickly.
Fannie Mae was down 22%, or $1.54, to $5.50 in after-hours trading on Friday. Freddie Mac lost $1.06, or 21%, and ended at $4.04.
Rick Rouse
Rick@OptionsMentoring.com
