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Shares of the nation’s two government-backed mortgage organizations have been on quite a rollercoaster ride the last few days.
Fannie Mae (FNMA) and Freddie Mac (FMCC), both mere penny stocks traded on over-the-counter exchanges, more than tripled Monday through Wednesday of this week. On Thursday, however, they declined 26% and 28%, respectively.
So what happened?
It’s not entirely clear, but it appears that the driving force behind the stocks’ big rally was a tax break Fannie Mae – a.k.a. the Federal National Mortgage Association – may be taking advantage of.
The organization may elect to recognize a more than $60 billion Deferred Tax Asset when it reports its fourth-quarter earnings. The organization said it expects to report “significant net income” thanks to the deferred tax asset, according to its SEC filing. Earnings were scheduled for Monday, but have been delayed to an unspecified date.
Sixty billion is a lot of tax-break money. But was it really enough for the stock more than triple? Apparently investors shared my skepticism.
After rising from 40 cents a share entering the week to as high as $1.45 early yesterday, Fannie Mae shares plummeted yesterday, falling back down to 78 cents. Freddie Mac (Federal Home Loan Mortgage Corporation) shares followed suit, rising from 41 cents entering the week to $1.42 early yesterday to 77 by day’s end.
Part of the pullback was likely just a natural correction. A drop in the 30-year mortgage rate likely played a role as well. The rate dipped from 3.63% a week ago to 3.54% currently. The 15-year fixed rate also dropped, from 2.72% to 2.79%.
The sudden volatility in Fannie Mae and Freddie Mac is quite baffling – not to mention a bit fishy – considering the two stocks had been in the 20-cent to 30-cent range for an entire year. Neither stock had risen above a dollar since May 2010.
Perhaps something else is at play. For now, though, it appears that Wall Street was temporarily intoxicated by the possible deferred tax break propping up fourth-quarter earnings. We’ll know more when the company finally reports those earnings.