Delisting Of Fannie, Freddie Foreshadows Fundamental Change

NEW YORK -(Dow Jones)- Federal regulators' decision Wednesday to remove shares of Fannie Mae (FNM) and Freddie Mac (FRE) from the New York Stock Exchange and have them trade on an electronic bulletin board marks a fundamental change for the two mortgage agencies now that they are operating under conservatorship.

The conservator, the Federal Housing Finance Agency, said the move was a result of both companies trading around $1 for more than 30 days.

"It's a formality," said Todd Abraham, a portfolio manager at Federal Investors Inc. "It's surprising that it didn't happen before."

Freddie Mac's shares haven't closed below $1 since Aug. 7, 2009, though they have hovered around the $1 level, while Fannie's have closed under $1 every day since May 19.

Freddie was recently down 40% at 73 cents, while Fannie traded 38% lower at 57 cents.

Other market participants, however, said they saw the move as a clear message, for anyone still in doubt, that Fannie and Freddie are government tools for fixing the housing market, no longer independent companies that can be traded for their worth.

"The delisting isn't a signal of where [the government] wants to go with Fannie and Freddie as it is disabusing people of the idea that they are independent entities," said Jim Vogel, agency strategist at FTN Financial.

The government took over the nominally independent mortgage finance companies at the height of the credit crisis in September 2008. Since then, while many plans for reform and restructuring have been discussed, there is no clear plan on how to get them out of government protection.

By withdrawing the shares from trading on the New York Stock Exchange, a process known as delisting, the government essentially rules out the option of the agencies resuming their former status as large, publicly traded companies, market participants said.

Analysts and others said they expected the government to continue extending its support to the agencies, as long as they served as vehicles to help deal with the housing crisis.

"The message is that the conservatorship relationship with the government is here to stay for a while," said Mustafa Chowdhury, head of U.S. rates research at Deutsche Bank. "The government has capitalized the GSEs to an extent where it's almost impossible to have a clear smooth separation again."

But the abrupt nature of Wednesday's announcement--like earlier moves, including the buyout of delinquent mortgages--shook investor confidence.

"The decision makes sense," Vogel said. "It's the lack of communication and transparency that surrounds some important operations of both companies that occasionally tries investor patience."

Agency debt securities were little moved in the secondary market. The risk premium--the added return investors demand to hold a particular security instead of super-safe Treasurys--on Fannie's 3-year bond, for example, narrowed by 0.7 basis point, according to Tradeweb data.

-By Prabha Natarajan, Dow Jones Newswires; 212-416-2468; prabha.natarajan@dowjones.com

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