×

For Fannie Stock, Even Betting Pennies Is a Risk

Nearly two years after it was effectively nationalized, Fannie Mae has become the nation’s hottest penny stock — and, perhaps, its most dangerous. Even though the shares are almost worthless, they are changing hands at a furious pace. Since June, about 31 million of them have been traded on a typical day, more than triple the average for Goldman Sachs shares.

NYSE Traders
Oliver Quilla for CNBC.com
NYSE Traders

All those Fannie Mae shares do not add up to much money. The stock closed at 40 cents Wednesday, about the cost of a first-class postage stamp. In mid-2007, before the housing market deflated, it fetched nearly $85.

“The volumes are astonishing,” said Bose T. George, a financial analyst at Keefe Bruyette & Woods. “It’s like a casino.”

The knockdown price partly explains why Fannie Mae typically ranks among the liveliest financial shares in the market: it doesn’t cost much to take a flier on Fannie.

But the Lilliputian price also explains why Fannie Mae might have buy-and-hold types feeling queasy. A penny or two change in the price translates into a big move in percentage terms. Last week, for instance, Fannie Mae’s shares rose 47 percent one day, only to sink 14 percent the next.

Behind all of this commotion are day traders, those creatures of the dot-com era. Mutual funds and other institutions have mostly abandoned Fannie Mae, as well as shares of its cousin Freddie Mac. The big money has ceded the marketplace to individuals who are bold enough, or perhaps foolish enough, to gamble on these stocks for a few hours.

"“It’s not really a stock anymore — everyone knows this is going to zero" -, Bose T. George,

Just don’t hold Fannie Mae too long, Mr. George advised. He predicted the stock would eventually fall to zero. It is difficult to know what other analysts think, since Mr. George is just about the only one who still covers Fannie Mae’s stock. His recommendation is an understated “underperform” — Wall Street code for sell.

“It’s not really a stock anymore — everyone knows this is going to zero,” he said.

Well, not everyone, at least not right away. But the running interest in Fannie Mae’s stock might seem surprising, considering that this company was the Titanic of the mortgage market. During the bubble years, Fannie Mae and Freddie Mac bought up so many toxic mortgages that the government was forced to take them over. Their stock prices promptly plunged.

The federal government today owns almost 80 percent of Fannie and Freddie, and few people, in Washington or on Wall Street, seem to know what to do with them.

Despite the trading frenzy, Fannie and Freddie have become pariahs. Most big investors won’t touch them. As of March 31, Fannie’s shareholders included two big money management companies, the Vanguard Group and BlackRock. But together they owned a mere 1.2 percent of the company, a pittance given the size of those investment companies.

Big institutions typically sell if a stock price sinks below $5. Fannie Mae has not traded that high in two years. Last month, both Fannie Mae and Freddie Mac were ignominiously tossed off the New York Stock Exchange because their share prices had languished below $1 for more than 30 days straight.

And so the once-mighty Fannie Mae and Freddie Mac have been banished to OTC Bulletin Board, home to lowly penny stocks and thinly traded “microcap” companies. As the Securities and Exchange Commission says in its guide for investors: “Investors in penny stocks should be prepared for the possibility that they may lose their whole investment.”

The question of what to do with these troubled giants vexes policy makers and bankers alike. Together, Fannie Mae and Freddie Mac own or guarantee roughly half of the nation’s $11 trillion home mortgage market. The new overhaul of financial regulation did nothing to address the companies, even though they played a central role in inflating the housing bubble.

The Obama administration plans to hold a conference on the future of housing on Aug. 17 to seek advice about reforming the rules governing mortgage finance. The goal is to deliver a proposal to Congress by January.

What that proposal will say is anyone’s guess. Fannie and Freddie’s harshest critics want the companies shut down. But even banking executives concede that, for now, the federal government will probably have to play some role in mortgage finance, given the industry’s dependence on Fannie and Freddie.

“The fundamental problem with Fannie and Freddie is that no one really knows what to do with them,” said Bert Ely, a financial and monetary policy consultant based in Alexandria, Va., and a longtime critic of the companies. Until Washington comes up with answers, the day traders will no doubt try to ride the swings in Fannie Mae and pocket some more pennies while they still can.