Summary
- Special situation securities can sometimes succeed even when the overall market is unruly.
- From the standpoint of market valuation, the Freddie Mac and Fannie Mae (F&F) preferred stocks are highly dependent on future court decisions and future actions of the Federal Housing Finance Agency.
- Past decisions by the courts have had major impacts on the valuations of the F&F preferred stocks. Over the next few months, new court decisions may be released.
- The terms and conditions of the F&F preferred stocks vary. Thus, scrutiny of the various F&F preferred stocks is needed before selecting which ones to invest in.
- I am not a lawyer and I have not reviewed the court cases in detail in recent years. Investors are advised to do their own due diligence.
Introduction
Freddie Mac (OTCQB:FMCC) and Fannie Mae (OTCQB:FNMA) (F&F) are government-sponsored enterprises (GSEs). F&F common and preferred shareholders’ investments will be affected by ongoing litigation challenging the direct expropriation and de facto nationalization of the GSE’s. For those seeking political alpha, i.e., increased returns resulting from changes in public policy, there is a case to be made that favorable developments could occur in the next few months with respect to several ongoing court cases.
Litigation is underway with respect to the “3rd Amendment” to the Senior Preferred Stock Purchase Agreements (SPSPAs) between the Federal Housing Finance Agency (FHFA) and the U.S. Treasury (Treasury), which created a “net worth sweep” (NWS).
In this Seeking Alpha article, I present my current “working hypothesis” with respect to the potential recovery of the GSE preferred stocks to levels that are closer to their indicated redemption value. I hope to begin to dig deeper into the prospects of the GSE’s over the next few weeks, focusing primarily on:
1. Studying the “acting director” issue. I’m especially interested in the argument that acting director DeMarco did not have the authority to impose an NWS via the 3rd Amendment at the time he did so because no legislature had approved his appointment to head the FHFA.
2. Examining the evidence that has been accumulating via expert reports and/or discovery in Judge Lamberth’s proceeding.
For investors in F&F preferred stocks, the ongoing litigation has, of course, been a slow process. Nevertheless, “buy and hold” investors in F&F preferred stocks that have the needed discipline and patience may eventually get a payoff. However, it is not possible to predict the timing and outcome of the ongoing litigation at this time. Investors should do their own due diligence.
