Potential structural changes in the U.S. residential mortgage industry, in particular plans to diminish the role of Fannie Mae and Freddie Mac, could disrupt the mortgage market and have a material adverse effect on our business.
Fannie Mae and Freddie Mac play a very important role in providing liquidity, stability and affordability in the current U.S. residential mortgage market. In particular, they participate in the secondary mortgage market by purchasing mortgage loans and mortgage-related securities for investment and by issuing guaranteed mortgage-related securities. In February 2011, the Obama administration delivered a report to Congress which proposed the winding down of Fannie Mae and Freddie Mac and shrinking the federal government’s role in the housing market. This proposal includes the withdrawal of government guarantees currently available on certain residential loans and increasing the down payment requirements for borrowers, both of which could reduce mortgage lending volume. In February 2012, the Federal Housing Finance Agency sent Congress a strategic plan to wind down Fannie Mae and Freddie Mac over the next several years. This proposal includes building a new infrastructure for the secondary mortgage market, continuing to shrink Fannie Mae’s and Freddie Mac’s operations by eliminating the direct funding of mortgages and shifting mortgage credit risk to private investors, and maintaining foreclosure prevention activities and credit availability. In August 2012, the U.S. Department of the Treasury announced it would require Fannie Mae and Freddie Mac to reduce their investment portfolios more quickly, at an annual rate of 15% versus the previous rate of 10%. The effects of these proposals or any significant structural change to the U.S. residential mortgage industry may cause significant disruption to the mortgage market. If we are unable to react effectively and quickly to changes in the residential mortgage industry, our business could be harmed.
I sold half my position, and kept the rest. I think it will go down more before it goes up again. What bothers me the most is the institutional distribution which is easily visible on the chart. Combined with the fact that ELLI beat Q3 estimates on both top and bottom line and raised guidance, and yet the stock still tanked 10%. And that was even AFTER a pre-earnings sell-off had occured.
So to summaraize, the stock did not enjoy a run-up into the Q3 earnings report. Instead, it was going down during the days/weeks leading up to the report. We figured the market was adjusting for a possible disappointment. So, what did we get? Turns out they blew away all analyst estimates, beat the high estimate, and raised guidance, and the stock still tanked. I've seen this movie before. Something is very suspicious and I can't put my finger on it. We can't blame the "fiscal cliff" drama because all this happened at a time when the market was still rising (i.e., before the election) and housing related stocks are still booming.