This week has shown quite a lot of volatility in US’s main housing mortgage companies Fannie Mae and Freddie Mac. I, in particular, look at Fannie Mae as it is a bigger of the two companies but both have been taking big swings to the upside and downside recently. FNMA, Federal National Mortgage Association, recently this month almost as high as $4.50 but this week recently dived as low $2.50. The recent drop was from a court case that showed the appeals court upheld a decision to deny hedge funds the right to challenge government-sponsored enterprises’ (GSEs) net worth sweep.
There is still a lot of work going into this case. FNMA sits at $3.07. If this ends up being bullish, it could bring FNMA at least 5x the current levels. You also have the risk of losing all $3.07 as well. There is plenty of risk in this one but you will have lots of angry people if the government does not do this one correctly. FNMA is a major part of the 30 year mortgage that would essentially go away if the company wasn’t recapitalized properly.
I wouldn’t put too much in this trade but I do think you can put a little here and end up with a nice capital gain or a small capital loss at the end.