Fannie Mae Bailout - Why we need it

There has been a lot of discussion about whether or not the Federal Government should be stepping in and fashioning a bailout on Fannie Mae (FNM) and Freddie Mac (FRE) which are both publicly traded stocks.  

While I feel strongly that we spend too much money bailing out failed banks, investors and more, I have very strong feelings about this particular bail out.

There's a bigger picture here that you might not understand.  Follow me through the Fannie Mae disaster.  Tomorrow I will write a diary similar to this regarding Freddie Mac.

Fannie Mae was originally created in 1938 by President Franklin Roosevelt when families were struggling to become homeowners.  At the same time, many more people were at serious risk of completely losing their homes - all of this was created as a result of mortgage funds in the United States not being readily available.

The premise when it was created was that mortgage funds would be available in our cities and towns regardless of what the economic outlook in a community was - to basically expand the funds to make sure that those who were interested in buying a home (or needing to refinance one) could do so.

In 1968 Congress approved a bill that made Fannie Mae a public entity - ensuring that future funding would come not from the government, but instead from shareholders - creating a 'bottomless' pool of money to be tapped into - not only investors but Mutual Fund Companies, pension plans and even investors from other countries were now able to help fund mortgages all over the United States.

On Fannie Maes website you'll find this:

Fannie Mae has always been committed to promoting responsible lending. We work with our partners to help develop solutions to the problem of predatory lending. Our goal is to help people get in and stay in a home they can afford. The current crisis in the housing market reaffirms the need for responsible lending.

Fast forward to this day:

Fannie Mae is a publicly traded stock on the NYSE - the trading symbol is FNM.  Today the stock is trading just under $10.50 per share (up I might add from just over $6 per share on 7/08).  Throughout the 1980's this stock struggled to raise above (and stay above) $10.00 per share.  A strong housing market, low interest rates and other factors have kept this stock as a 'safe' investment especially for long term investors.

Long Term Investments:

And herein lies part of the problem with no bailing out Fannie Mae today.  Because of the 'safety' of Fannie Mae as time has gone along, the 975.41M shares that are outstanding are now held by 'institutional investors'. Well you might be thinking to yourself then that's not a small investor so we're bailing out big business again.

I beg to differ with you:  300,008,816 shares are held by a variety of Mutual Fund Companies. These companies hold these assets for those who have retirement accounts, small investment accounts and more.  Here is what is so frightening about that.  Over the last 12 months, the price of Fannie Mae has fluctuated from $70.57 per share to 6.68 per share.

Think of a small shareholder who may have held this fund in their retirement account? Think of the company investment plan that they felt was safe because they had a lot of FNM stock in their account and after all, it's backed by housing so how can it possibly fail.

Let's take a small investor that invested enough money to purchase 100 shares of FNMA during this year.  Let's say they took the money from their 401K Plan and invested $7500 to purchase FNM at the 'high' price.  Today, that investment is worth approximately $1500.  Bad news for the person who has this stock in their investment account.

I believe that in spite of the fact that we shouldn't reward bad business practices that for those shareholders who are suffering this type of a loss, Fannie Mae HAD to be bailed out.

Not only does (did) this have an impact on home owners but it also has a serious impact on small investors as well.  The housing crisis has reached levels where it no longer only impacts us as homeowners (and renters) but it also has seriously impacted thousands of unseen/unnamed people by having a negative impact on their financial health - today and tomorrow.

Like all who participate in the housing market, Fannie Mae has a responsibility to help home buyers, homeowners, and communities through market challenges. We believe in the long term health of America's housing market. The nation is growing and that growth will bring a renewed demand for housing and for responsible, sustainable mortgage lending. Fannie Mae will be there to help meet America's changing housing needs.

We need Fannie Mae here to help the next generation of future home buyers, sellers and to continue to be a strong force in helping make sure that those who want to buy homes (a) have money available in their communities (b) get the valuable education for home ownership that Fannie Mae offers at no charge and (c) ensure that we continue to have a strong housing market overall. Fannie Mae protects every home owner (though not the market) who has a Fannie Mae loan.  It's not just protecting lenders!

This is why I believe we had no choice but to agree to a Fannie Mae bailout.

Thanks for reading!