Citigroup Inc. (C) Ponies up $968 Million to Fannie Mae, What’s Next?

However, when this spin-off actually happens, preferred shareholders will be paid off first. So investing in common shares is not a long term play. That said, there is also the possibility of the preferred class being converted to common.

The Bottom Line

Fannie and Freddie made profits in 2012 for the first time in about seven years. But they still owe the government about $180 billion. At the same time each has revenues of about $100 billion. Some analysts note paying back the government bailout debt will take another five years.

In the meantime, the housing giants will be refinancing this debt by selling bonds at lower interest rates in order to repurchase their higher interest rate offerings. And these refinancings should boost the share price of Fannie and Freddie.

It is unclear what the valuation of these outfits will be in the long run. Fannie is presently trading at about $1.70 per share. This is far above the 52-week low of nine cents and off the high of $5.44. Fannie’s price earnings ratio is 12.20 –  below the S&P 500 PE of 17.70. As for Freddie, it is hovering at $1.60 share.

Combining these fundamentals with clear indicators the housing market is on the mend means the mortgage market will also improve. So there might be profits on the horizon for both lenders. In any case, for those investors with nerves capable of coping with a bumpy ride, a small slice of the Fannie and Freddie pie may be worth a second look.

Ultimately as long as Fannie and Freddie remain in a Treasury Department conservatorship they continue to be backed by the Federal government. And until the housing finance giants are eventually replaced by a surviving entity, they are needed to keep the mortgage securitization market afloat.

The article Citigroup Ponies up $968 Million to Fannie Mae, What’s Next? originally appeared on Fool.com and is written by Kyle Colona.

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