Why did Fannie Mae stock crash?

The Fannie Mae and Freddie Mac stock crashed after the Supreme Court dismissed the court case by its shareholders, which sought to have the FHFA return some of its profits.

Fannie Mae and Freddie Mac experienced a drastic share price drop on Wednesday, 23 June 2021. This was after the Supreme Court’s ruling on the court case by its shareholders was dismissed. The legal battle was prompted by the shareholders looking to receive the additional profits paid to Treasury by the two entities, following a completion of money received from the National Treasury.

In order to make sense of the current situation, it is important to look back at the root of the issue. During the Great Depression, Fannie Mae and Freddie Mac each reportedly received $100 billion from Treasury. This was after the entities exposed themselves too much to sub prime mortgages, with very little capital reserves to cover the exposure.

The agreement was understood to be that the entities would pay back the government with senior preferred stock. Moreover, while the company still owed Treasury, the loan would mean that the two entities would then be under a conservatorship under the Federal Housing Finance Agency (FHFA). The purpose of the FHFA would be to regulate Fannie Mae and Freddie Mac, which are now government-sponsored entities.

Fast forward to 2016, the entities were estimated to have paid the government back in excess. The estimated amount paid back was $300 billion. Therefore, shareholders sought to have the excess paid back to the entities and to be removed from the conservatorship. However, the ruling by the Supreme Court denied the legal application.

The court suggested that the entities could retrieve some of its excess funds, but not the entire requested amount. It was later reported that the entities could strive to lift the conservatorship, in light of the judge indicating that “the possibility that the unconstitutional restriction on the President’s power to remove a director of the FHFA could have such an effect cannot be ruled out.”