Freddie Mac (OTCMKTS:FMCC), otherwise known as the Federal Home Loan Mortgage Corp., has had a rather strange trendline emerge over the last year, despite a housing bubble kicking in. In fact, Freddie Mac is well on its way to new highs for the year, even as some calls grow to take it out of conservatorship and some recent restrictions are being called into question.
Take the Training Wheels Off
In recent trading, Freddie Mac was up 7.9%, which isn't so outlandish given the current state of the housing market and the company's overall stock level, which is not only well on its way to the high-water mark for 2021—last seen back in January when the stock hit $2.33 per share—but potentially able to make a play for the 52-week high of $3.08.
A recent letter from the Community Home Lenders Association (CHLA) likely put a little extra boost in Freddie Mac's share price; the letter, sent to both the Treasury Department and the Federal Housing Financial Agency (FHFA), requested that previously-established limits on Freddie Mac and its close cohort Fannie Mae be suspended. The limits were adopted back in January, reports note, and called for some closer restriction on what the agencies could do. Reports further noted that the restrictions called for a limit on Freddie and Fannie's ability to buy “higher risk” loans, as well as limits on the amount of loans a government-sponsored enterprise (GSE) could engage in to begin with.
With the housing market significantly destabilized right now, and running pretty hot at that, the CHLA is looking to give Freddie Mac some extra room to run to help address some of these points and help ensure the best access to mortgage credit.
A Slipping Analyst Sentiment
Freddie Mac, based on our latest research, has seen some wild shifts in sentiment. It spent a good long while as a “buy”, until the consensus shifted to “hold” back in December and has stayed there ever since.
This time last year, Freddie Mac was a mixed sentiment, coming in at two “buy” ratings, two “hold” and one “sell.” Six months ago, that shifted to three “buy” and two “hold”, with “sell” departing the field altogether. It didn't take long for “sell” to come back, though, as three months ago, sentiment shifted to four “buy”, two “hold” and one “sell.” Today, meanwhile, we're at three “buy”, two “hold” and two “sell”, which is putting some oddly bearish pressure on a company that's nearing its highs for 2021 so far.
The price target, meanwhile, has a fairly broad range to it. While the average is looking for the price target to hit $3 per share—which suggests a bit of upside given yesterday's close of $2.18—there are some that are sufficiently optimistic to look for this to hit $5 a share. Others, however, are expecting much the opposite and the price to drop down to $1 per share.
The pessimist's angle, currently held by Keefe, Bruyette & Woods, saw Freddie Mac's rating lowered to “underperform” from “market perform” back on March 17. However, this was quickly ameliorated by Odeon Capital Group, who came out at the end of March to upgrade from “sell” to “hold”, and raise the price target from its original $0.50 to $2.
Taking Advantage of a Gaining Market
The biggest thing right now for Freddie Mac is that the mortgage market is running red-hot. Its primary stock in trade is hotly in demand right now and that should be opening the floodgates. The notion that restrictions on the company should come off—as espoused previously by the CHLA—would seem like a reasonable response to market conditions.
However, since Freddie Mac is a GSE, that kind of changes the picture a little bit. Sure, mortgages are heavily in demand right now. We're seeing an ongoing exodus out of the cities—especially in some states like New York—due to a combination of lockdown frenzy taking the few good reasons to be in a city out of the picture and certain other politics making cities less safe than ever. Throw in the rise of telecommuting, which became less a begrudgingly-offered perk and more a survival strategy, and that's putting a particular call on mortgages, especially for rural properties where there's a greater perceived safety in much lower population density.
Getting Freddie Mac more involved in this pool would likely be helpful to its bottom line, though the issue of increasing exposure to “higher risk” loans doesn't exactly sound like a great strategy. Granted, higher risk loans commonly mean higher interest, which means a greater return, but that same risk could torpedo the entire mortgage if not carefully considered.
With Freddie Mac making a run not only on its highs for the year so far, but also for its 52-week highs, a certain amount of caution is called for. Still, for those who want to buy in on the housing market's rapid ascent, and do so without a whole lot of risk at a share price better suited to buying candy bars than stock, Freddie Mac may be just the alternative you're looking for.
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