Corporate & Securities Law

Fannie Mae, Freddie Mac Preferred Stock Losses

By Mark Maddox

Thousands of institutional and retail investors of Fannie Mae (FNM) and Freddie Mac (FRE) preferred stocks have witnessed the collapse of their investment portfolios following the government?s takeover of the two mortgage giants on Sept. 6, 2008. Many of these investors initially purchased huge concentrations of Fannie Mae and Freddie Mac preferred stock based on misleading information from their brokerages or financial advisers.

In some instances, investors were never told about the potential risks associated with investments in Fannie Mae or Freddie Mac. Instead, the stocks were described as conservative - investments designed to provide investors with consistent income via above-average dividends. After all, Fannie Mae and Freddie Mae stood as the nation?s mortgage giants. They were too big to fail. And, as so-called government-sponsored entities, investments in Fannie Mae and Freddie Mac were guaranteed or implicitly guaranteed by the federal government. At least that?s what many investors believed.

Instead, on Sept. 6, 2008, the federal government seized control of the too-big-to-fail lending companies, placing Fannie Mae and Freddie Mac into a government conservatorship under the Federal Housing Finance Agency (FHFA). In turn, the government?s bail-out wiped out Fannie Mae and Freddie Mac?s common and preferred stockholders. All dividends for the two companies were eliminated.

Several months prior to the near-collapse of Fannie Mae and Freddie Mac, on May 13, 2008, Fannie Mae announced plans to raise some $6 billion in capital by issuing an offering of 8.25% Non-Cumulative Preferred Stock, Series T. In reality, that amount could never sufficiently address the lender?s overall deteriorating financial health, which had nosedived as a result of mortgage-related losses, poor underwriting standards and risk management procedures. The full extent of Fannie Mae?s capital deficiencies was never disclosed to investors, however. Moreover, many investors were advised that the Fannie Mae Preferred Stock, Series T was a safe and stable investment suitable for conservative portfolios.

When the Treasury Department announced takeover plans for Fannie Mae in September 2008, the price of the Fannie Mae Series T Preferred Stock dropped dramatically, falling more than 88% from its initial offering price of $25 per share on May 13, 2008, to $3 per share on Sept. 8, 2008.

If you are an institutional investor or retail investor and were misled about your investments in Fannie Mae or Freddie Mac preferred stocks, we want to hear your story. You may have a viable claim for recovery of your investment losses by filing an individual securities arbitration claim with the Financial Industry Regulatory Authority (FINRA). Leave a message in the Comment Box below or via the Contact Us form.

Full post as published by Representing Investors on November 30, 2009 (boomark / email).