Fannie, Freddie investors buying ‘worthless’ stock, says former regulator

The big investors who’ve been gobbling up shares of Fannie Mae and Freddie Mac are making “worthless” bets, according to the mortgage finance giants’ former regulator

The big investors who’ve been gobbling up shares of Fannie Mae and Freddie Mac are making “worthless” bets, according to the mortgage finance giants’ former regulator.

Several hedge funds have invested heavily in Fannie and Freddie in recent years. The companies, which teetered on the edge of collapse in the wake of the housing crisis, were bailed out by the government and have finally returned to profitability. Many investors hope to make a killing if the government ever sells the controlling stake in the companies it acquired when they went into conservatorship in 2008.

But James Lockhart, until 2009 the director of the Federal Housing Finance Agency, says that’s unlikely.

“It's a stretch,” Lockhart, now vice chairman at private equity firm WL Ross & Co., said in a Reuters interview. “The stock and the preferred (stock) is worthless, and should be worthless.”

Although Fannie and Freddie have now returned $202.9 billion – more than they took in the bailout – to the Treasury in dividend payments, they lost almost all their value following the financial meltdown. Lockhart told Reuters that the mortgage finance giants would not have survived the crash without the $187.5 billion cash infusion they received from the government.

And if plans in Congress to wind the companies down go forward, all the stock bought by hedge funds like Paulson & Co. and Perry Capital LLC would be worthless. Investors in those firms have filed suit against the government challenging bailout conditions that require Fannie and Freddie to send all their profits to the Treasury, Reuters reported.