Fannie Mae Not

My dumbest investment was in shares of Fannie Mae. Need I say more? I lost much of my investment in a single day! Ouch. Never again. — C.G., online

The Fool Responds: The Fannie Mae story has been complicated — and costly to many investors.

Fannie Mae, more officially known as the Federal National Mortgage Association, is a government-sponsored enterprise (GSE) that, in its own words, is a “leading source of financing for mortgage lenders, providing access to affordable mortgage financing” to millions of homebuyers.

The GSE racked up losses in the 2000s from sub-prime mortgages, and in 2008, along with Freddie Mac (the Federal Home Loan Mortgage Corporation), it was bailed out by the federal government and placed under federal supervision. Its dividend was suspended and has yet to be reinstated. Its investors saw the stock fall from roughly $70 per share in 2007 to $7 on the day before the bailout, before plunging 90% the next day, to $0.73 per share, following news of the bailout. More recently, shares have been trading near $2.80, and Fannie Mae is still under government conservatorship.

A lesson here for investors is to dig deeply into a company’s situation and prospects if its shares start falling significantly. Better still, keep up with the company all along, to reduce chances of being unpleasantly surprised by bad news. Diversification helps, too: Don’t keep too many eggs in any one basket.