Navigating Fannie Mae and Freddie Mac Preferred Shares: Understanding the Varieties and Differences
Companies issue preferred stocks to raise funds, and Fannie Mae and Freddie Mac are no exception. These government-sponsored enterprises (GSEs) have issued a variety of preferred shares that can be daunting for investors to navigate. In this article, we will explore the different types of Fannie Mae (FNMA) and Freddie Mac (FMCC) preferred shares, the factors that differentiate them, and the significance of their roles in finance.
The Role of Fannie Mae and Freddie Mac in Preferred Stocks
Fannie Mae and Freddie Mac, as government-sponsored enterprises, play significant roles in the mortgage finance market. They issue preferred stocks to raise capital for purchasing and selling mortgages. These preferred shares are referred to as GNMA (Government National Mortgage Association) and FNMA (Federal National Mortgage Association) for Fannie Mae, and FHLMC (Federal Home Loan Mortgage Corporation) for Freddie Mac.
The exact differences between the various issues of preferred shares can often be complex and detailed. Prospective investors should refer to the prospectus of each issue for precise differences. However, for a broader overview, online platforms like QuantumOnline offer free registration and resources to help investors understand these different types of preferred stocks.
Understanding Fannie Mae Preferred Shares
FNMA Capital Securities
Fannie Mae capital securities (capped floating-rate preferred shares) have a unique structure. They carry a fixed coupon rate that is monthly adjustable based on the movement of the federal funds rate. These securities are categorized as equity and are not tax-exempt.
Key Features: Fixed coupon rate with monthly adjustments Not tax-exempt Categorized as equity
FNMA 6% Guaranteed Preferred Securities
The FNMA 6% Guaranteed Preferred Securities are a guaranteed priority preferred equity that has a fixed 6% annual dividend rate. These securities are more than just preferred securities; they are backed by the full faith and credit of the U.S. government. This guarantee makes them an attractive investment for risk-averse investors.
Key Features: Fixed 6% annual dividend rate Guaranteed by the U.S. government More available to high net worth individuals and institutions
Understanding Freddie Mac Preferred Shares
FHLMC Preferred Stock Class E
FHLMC Preferred Stock Class E (referred to as "Preferred Stock E") is the most commonly issued class of Freddie Mac preferred stock. These stocks pay a fixed dividend rate and carry a risk parity of 133%. This means that for every 100% of risk a typical equity investment would bear, Preferred Stock E would bear 33% more, making it less risky.
Key Features: Fixed dividend rate Diversified risk through 133% risk parity Available to a wide range of investors
FHLMC Preferred Stock Class A
FHLMC Preferred Stock Class A, also known as "Preferred Stock A," pays a rate of return based on the municipal bond yield. These shares are typically bought by high net worth individuals and wealthy institutions that seek stable, tax-free income.
Key Features: Dividend rate based on municipal bond yield Tax-exempt Tailored to high net worth investors
Conclusion
While the differences between the preferred shares issued by Fannie Mae and Freddie Mac may seem complex, understanding their unique features and benefits can help investors make informed decisions. As the mortgage finance market continues to evolve, it is important for investors to stay informed about the various types of preferred shares available. Whether you are a high net worth individual, a wealthy institution, or a risk-averse investor, knowing the differences can help you choose the right investment for your portfolio.
Key Takeaways: Fannie Mae and Freddie Mac issue various types of preferred stocks for capital raising. FNMA and FHLMC preferred shares have distinct features and guarantees. Investors should consider their risk tolerance and financial goals when choosing between different types of preferred shares.