Federal National Mortgage Association (Fannie Mae - FNM) - Can it Really Go Under?

We've held off on this one for some time, but it has come to a point where we currently believe that the moment of truth is at hand and it's time to make a stand in our own belief. In our opinion, Fannie Mae, the Federal National Mortgage Association (FNM) has reached near-bottom levels. Having fallen to floor prices not seen since the late 1980's/ early 1990's, Fannie Mae has recently seen share prices down over 80% in the last 12 months alone. With today's opening price of $6.68, a massive panic accounted for the discount of the company that opened under speculation of a government takeover bid as investors ran to buy the company's bonds & ditching the company's stock.

But as the volatility increases on recent action, one can only ponder the irrationality of the market in respects to the tangible fiscal situation of the company. With fears of insolvency sparking fond memories of the recently departed Bear Stearns, the question posed remains to be whether or not Fannie Mae will likely discover itself to be in such a similar situation. It is our position that Fannie Mae will not and absolutely cannot ever be found insolvent. The consequences of such would lead to more dire issues than a mere housing disaster and credit crunch.

But will the government take the company over and place the burden upon the taxpayer? After all, this is the current fear that sent today's share price opening near a 50% spread of last night's close. In an extreme outlook, the possibility remains viable... but impractical. After all, Fannie Mae was converted to a private corporation and removed from the federal budget back in 1968 for a good reason. Likewise, there are many more feasible options for the government to invoke that that would be less intervening than a full-on takeover. Revising the line of credit the GSE's have with the Treasury Department and/or opening a credit line with the Federal Reserve are two possibilities that would likely be looked upon prior to any spontaneous annexation of the company.