Penny stocks can be interesting equities. But what can be more surprising is that some of the most popular small cap stocks don’t trade on major exchanges. We’ve discussed the Robinhood trading app and others in the past. These digital brokers don’t allow for trading of penny stocks that listed on the OTC exchange.
Sure, these penny stocks may be a bit risky due to looser filing requirements. But at the end of the day, many of the companies behind the stocks are well-established. Others are even government backed.
Take Federal Home Loan Mortgage Corp (FMCC Stock Report) for instance. The US-based company has government-sponsorship. The company invests in mortgage loans and mortgage-related securities. It organizes its business in reportable segments, namely Single-family Guarantee, Multifamily, and Capital Markets.
The company originates, purchases, and guarantees single-family loans originated by its seller. But the crazy part is, you can’t trade it through every broker because it’s an OTC penny stock! That’s right, FMCC is not a Robinhood penny stock. Although other brokers like ETrade and TDAmeritrade allow trading of FMCC stock.
Is FMCC A Penny Stock To Buy After Rate Cuts?
Freddie Mac provides guarantee and security for the payment of principal and interest on the mortgage-related securities. It does this in exchange for management and guarantee fees. The latest announcement that the Federal Reserve will cut rates could be a boon to FMCC. Lower interest rates could equate to an influx in new mortgages. And according to the company’s latest report, “low rates, along with a thriving labor market, will help sustain the housing market, not just short term, but for at least the next year and a half.”
The company purchases multifamily loans for aggregation and then securitization through the issuance of multifamily K Certificates. The firm also issues and guarantees other securitization products. It generates maximum revenue from the Capital Markets segment.
The Consumer Financial Protection Bureau said it will retire a policy that gives FMCC (and FNMA) a competitive advantage in complying with underwriting rules. The CFPB’s new announcement could have an effect on FMCC (and FMNA) current domination of the market. The agency’s intention to eliminate the GSE patch is only the start. Ending the patch means the GSE-backed loans with DTI ratios above 43% are suddenly noncompliant with QM. Lenders originating Fannie and Freddie loans suddenly have to overhaul underwriting.
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Pete Mills, senior vice president of the residential policy at the Mortgage Bankers Association, stated “the goal here is to get a version of the patch [so that] QM covers a significant percentage of the borrowers that are currently served, but applies to the market entirely.” Some want to move away from DTI or considering other factors to assess a borrower’s ability to repay, however others have argued for a lower DTI limit.
What’s Next For This Penny Stock?
Ed Pinto, a resident fellow at the American Enterprise Institute’s Center on Housing Markets and Finance, said that with interest rates falling, homebuyers may not need as much leverage because monthly mortgage payments are going down. Loans with debt-to-income ratios above 43% sold to Fannie peaked in December at 31.5%. But then they dipped to 27.1% in April, Pinto said.
For FHA purchase loans, 61% had DTIs above 43%, which also peaked in December, but dropped to 57% in April.”The industry is going to have to take this for what it is — the patch is going to expire and we don’t know if anything will take its place, or the 43% DTI becomes the rule,” Pinto said.
Michael Bright, CEO of the Structured Finance Association said it best as “the patch is acting as a Band-Aid over a much deeper issue that we have in this country, which is that incomes are going up much more slowly than home prices,” he said. Now that rates officially decreased, could this signal a turn around for housing stocks like FMCC?
Wednesday saw some of the biggest trading volumes for the penny stock. Furthermore, later in the afternoon, Freddie Mac stock price recovered dramatically from intraday and 2019 lows.
