Federal National Mortgage Association, better known as Fannie Mae, has long been a behemoth in the US housing market. As a government-sponsored enterprise, it plays a crucial role in providing liquidity and stability to the mortgage market, ensuring that Americans have access to affordable homeownership. Since the 2008 financial crisis, Fannie Mae has been under conservatorship, subject to strict oversight and regulations. This period has been marked by financial uncertainty and a focus on risk management, leading to relatively subdued growth and muted investor interest.

However, a careful examination of Fannie Mae's recent financial data, specifically focusing on their preferred stock series FNMAT, reveals a potentially explosive trend that seems to have been overlooked by the wider market. While analysts have been preoccupied with the familiar metrics of earnings per share and revenue growth, a subtle shift in the company's balance sheet points to a potential resurgence of this sleeping giant. The key lies in the intricate dance between Fannie Mae's common stock and its preferred stock offerings, specifically FNMAT.

While common stock represents ownership in the company, preferred stock functions more like a bond, offering a fixed dividend payment and priority over common stockholders in the event of liquidation. FNMAT, one of Fannie Mae's preferred stock series, has historically provided a haven for investors seeking a steady income stream in the tumultuous world of mortgage finance. However, something unusual is brewing within this seemingly stable corner of the market.

Examining the quarterly balance sheets, we see a consistent reduction in the "Preferred Stock Total Equity" allocated to FNMAT. This decrease suggests a deliberate strategy by Fannie Mae to retire its preferred stock, a move that could have far-reaching implications for both common stockholders and the company's overall financial health.

The Declining Preferred Stock and Soaring Common Stock

The data tells a compelling story. While there are some inconsistencies in the provided data for 2021 and Q1 2023, the general trend of declining preferred stock is evident:

Source: Fannie Mae Quarterly Balance Sheets

During the same period, FNMAT's common stock, trading under the ticker FNMA, witnessed a remarkable surge. The stock price, languishing below $2 for years, broke out in late 2022, reaching a high of $4.74 in June 2023. This sudden surge in value suggests that investors are anticipating a significant change in Fannie Mae's fortunes.

The shrinking Preferred Stock Total Equity coupled with the soaring common stock price suggests a bold hypothesis: Fannie Mae is strategically retiring its preferred stock, a move that could pave the way for a return to private ownership and unleash a wave of value for common stockholders. By reducing its preferred stock obligations, the company is signaling its confidence in its future profitability and reducing the burden of fixed dividend payments, freeing up capital for investment and growth.

Potential Impact and Risks

The potential impact of this overlooked metric is immense. If Fannie Mae is indeed preparing for a return to private ownership, its common stock could skyrocket, potentially rewarding investors who recognized this subtle shift in the company's balance sheet. Moreover, a revitalized Fannie Mae could inject new vigor into the housing market, increasing liquidity and potentially driving down mortgage rates, a boon for prospective homebuyers.

While this hypothesis is not without risks, the potential rewards are substantial. The dwindling Preferred Stock Total Equity for FNMAT, a seemingly mundane metric, could be the canary in the coal mine, signaling the reawakening of a giant that could reshape the US housing landscape.

"Fun Fact: Fannie Mae's original charter required it to operate with a capital reserve equal to only 2.5% of its mortgage holdings. This low reserve requirement contributed to the company's vulnerability during the 2008 financial crisis. However, following the crisis, regulations were tightened, requiring Fannie Mae to maintain a significantly higher capital reserve, bolstering its financial stability and resilience."