Fannie Mae, Freddie Mac Regains Momentum On a Major News

One of the biggest casualties of the 2008 economic meltdown was the two home mortgage companies Federal National Mortgage Association (OTCMKTS:FNMA) and Federal Home Loan Mortgage Corp (OTCMKTS:FMCC) and eventually, the two were bailed out by the United States government. 

U.S. Supreme Court to Weigh Shareholder Suit

This Thursday, there was a major development with regards to those companies that resulted in a rally in the stock. Yesterday, the United States Supreme Court gave the affirmative with regards to an appeal from the Donald Trump administration, which is seeking to avoid a lawsuit from Fannie Mae and Freddie Mac shareholders. The lawsuit is directly related to the bailout of the two entities by the government during the economic crisis of 2008. 

The Supreme Court judges are going to review a ruling made by the 5th U.S. Circuit Court of Appeals in New Orleans last year. The ruling stated that the shareholders in the two entities were within their rights to challenge the agreement reached between the Treasury Department and the Federal Housing Finance Agency. 

The 2012 deal had eliminated dividend payout for the shareholders, and in addition to that, two companies had to pay the Treasure Department 25% of their quarterly net worth at the end of each quarter. In addition to that, the Supreme Court also agreed to take up a related appeal that challenges the constitutional nature of the agency at large. 

The fact that the Supreme Court has taken up the issue proved to be a boost for the stock as well, and the Fannie Mae and Freddie Mac stock rose by as much as 5% on Thursday. It remains to be seen if the stock can further add to its gains on Friday and beyond. Investors could do well to keep a close eye on the development over the coming days. However, that is not all.

Stock Upgrade 

The Supreme Court related development also made Dick Bove, an analyst at Odeon Capital to upgrade the stock from sell to hold. According to the ruling from 2012, the government was free to collect hundreds of millions of the company’s earnings every quarter, and hence, it is quite clear why there was a rally in the stock following this development. 

If Fannie Mae and Freddie Mac could keep the bulk of those earnings, then it could change the face of the company and also result in dividend payout for the shareholders. Bove stated that although he is not a trained lawyer, he expects the shareholders to win the case, and if that happens, there could be a paradigm shift in the operations of the companies in question. However, he went on to state that even if shareholders do prevail in the case, the government will keep the dividends that it has already been paid.

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