Shares of Fannie Mae and Freddie Mac, once the giants of the mortgage financing world—plunged yesterday, June 16, on news that the companies’ shares would no longer trade on the New York Stock Exchange. The shares will trade only on the over-the-counter bulletin board system.
The shares have been in danger of delisting since 2008 when federal regulators took over the companies and their stock prices collapsed. The Federal Housing Finance Agency, which now governs the two companies, instructed them to delist voluntarily after warnings from the New York Stock Exchange that Fannie Mae faced a mandatory delisting since its shares price had averaged less than $1 for the past 30 days.
The Federal Housing Finance Agency could have avoided the delisting by ordering the companies to perform a reverse split wherein, say, 10 shares priced at 56 cents (yesterday’s close for Fannie Mae shares) turn into 1 share worth $5.60. But it’s unlikely that a reserve split would have kept the price above $1 for long and the agency, which is facing the need to come up with a plan to fix these two key players in the mortgage market, has apparently decided that defending the share price of two companies that are currently not viable as public companies sent the wrong signal to the financial markets.
Fannie Mae and Freddie Mac own or guarantee about 50% of the $11 trillion mortgage market but only an unlimited line of credit from the Federal government has kept the companies alive. Taxpayers now own 80% of the two companies and it’s likely that any final plan will require billions more in taxpayer money (the agency estimates $177 billion) so any restructuring will almost certainly wipe out any remaining private shareholders.
The Obama administration has said that it doesn’t plan to tackle the job of restructuring Fannie Mae and Freddie Mac until 2011.
The biggest short-term effect?
Many of the big institutional investors such as Vanguard Group that, according to data from Bloomberg, still own shares of Fannie and Freddie, are prohibited from owning shares that aren’t listed on an exchange.
The delistings will take effect in early July.