However, intuitively, I have made a few assumptions. One is that these agencies have fallen so much, they have probably already discounted the worst possible news. Secondly, these are US-government backed agencies, and are unlikely to go out of business.
Next, the securitization of mortgages are in my opinion still an essential financial instrument. With mortgage backed securities, there would be a larger supply of capital to fund mortgages, instead of it being limited solely to the neighbourhood commercial banks. The only problem occurs when mortgages are leniently granted (sub-prime) as the risk will be passed on to other parties. So, I believe in the long-term, mortgage securities are here to stay, unless the government explicitly restricts their operation.
That being said, let's look at the Fannie Mae (FNM) 3 year daily chart.
3 year daily chart of FNM
Source: StockCharts.com
Source: StockCharts.com
FNM has suffered a huge drop in price. However, there seems to be some sign of life now. First, we have been seeing higher lows, one in December 08, another in March 09 and one more in July 09. Next, recently FNM has been testing the high set in December 08. Thus, FNM is currently consolidating, showing that it has stopped dropping, and there is a possibility of breaking out.
Fundamentally, there has been some positive news recently about FNM. Firstly, the housing market is showing some firming, with July home sales surging 7%. Besides that, the Fed has just bought a record $5.6 billion of agency debt yesterday, which can be interpreted as a sign that the government will not let Fannie Mae fail.
All in all, FNM goes on my watchlist. I would see a buy signaled when the management of FNM details a recovery plan and a change in business strategy to prevent housing bubbles, or to minimize the impact of a housing bubble. Technically, I might buy when prices break out strongly from the current consolidation.
(Disclosure: I do not hold any FNM stock at this point in time)
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