The Daily Walk of Shame: Fannie and Freddie

Fannie Mae (NYSE: FNM  ) and Freddie Mac (NYSE: FRE  ) have often been described as wards of the state. Amble southwest from D.C. and you'll find this term defined by the Texas Department of Assistive and Rehabilitative Services as "a child who, as determined by the State where the child resides, is a foster child, is a ward of the State, or is in the custody of a public child welfare agency."

The third option is probably the best way to describe the present-day Fannie and Freddie. The two mortgage agencies absolutely blundered through the housing bubble and financial crisis that followed, and as a result the government took these poor, misguided children under its wing. Unfortunately for shareholders, Uncle Sam is pretty much seeing to it that the blundering continues.

In a recently released SEC document, Fannie Mae outlined the goals that officers would have to meet to qualify for "long-term incentive awards." No. 1 on the list says it all:

[B]eing a recognized leader in the housing recovery by providing liquidity to the mortgage market and helping to prevent foreclosures (which includes objectives relating to volume of borrowers assisted, administration of the Making Home Affordable Program and market share)

In plain English that says that Fannie's officers will be rewarded based on whether the company continues to run itself like a charitable government organization rather than a profit-seeking private company. And don't worry, those officers will have plenty of taxpayer money to play around with to meet that goal. Earlier this week the Treasury lifted its cap on how much it will throw at Fannie and Freddie from $400 billion to ... um … infinity.

This is all great news for the heads of Fannie and Freddie, because losing money is typically much easier than making money. And while everyone rips their hair out over the compensation packages at Goldman Sachs (NYSE: GS  ) , Morgan Stanley (NYSE: MS  ) , and Citigroup (NYSE: C  ) , the Fannie and Freddie CEOs each received packages amounting to an annualized $6 million in 2009 for their companies' value-destroying performances.

And don't worry, those big pay packages aren't at risk from the companies' lousy stocks. Apparently, the Fannie and Freddie officers have realized the bleak future for the shares and have opted to take their pay in 100% cash.

So what does this all add up to? We've got two companies that are primarily owned by the government, being pushed to provide liquidity to the mortgage market whether or not it's in the companies' best interests, and top executives probably wouldn't blow their noses on the stock certificates. And there are people actually buying this stock?

I think Fannie and Freddie will probably be lousy investments; Morgan Housel tells us how to avoid becoming terrible investors.

Fool contributor Matt Koppenheffer does not own shares of any of the companies mentioned. You can check out what Matt is keeping an eye on by visiting his CAPS portfolio, or you can follow Matt on Twitter @KoppTheFool. The Fool's disclosure policy knows how to spell trouble.


Read/Post Comments (29) | Recommend This Article (47)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On December 29, 2009, at 4:28 PM, fyibob wrote:

    You might want to check into some of the other unintended consequences of having the government underwrite nearly every home mortgage in America.

    FHA has replaced sub prime. Andrew Cuomo gets to write the HVCC appraisal code through threat of lawsuit.

    The Fed has to buy all the low interest MBS because no one else will.

    and on and on.

  • Report this Comment On December 29, 2009, at 4:44 PM, Fool wrote:

    So, what are we going to do about it?

  • Report this Comment On December 29, 2009, at 4:56 PM, CantFoolMe2 wrote:

    At least we can sell the stock short!

  • Report this Comment On December 29, 2009, at 4:58 PM, CantFoolMe2 wrote:

    At least we can sell the stock short!

  • Report this Comment On December 29, 2009, at 5:02 PM, jkeefe1 wrote:

    Gee, isn't it about time that we considered that the management of the Board of Fanie and Freddie - namely the Congress of the United States - are the ones who should be fired?

    Seems to me we have opportunities for a few layoffs coming up in 2010 and 2012.

    /j

  • Report this Comment On December 29, 2009, at 6:07 PM, 1950BabyBmrWidow wrote:

    "[M]ortgage [B]acked-[S]ecurities? Isn't that the newest oxymoron? Either good paper or bad, high interest or low, 'someone' has to service these loans, no? and when the consequences of the of the actions of the enabled sons and daughters of the parents born in the years from 1947-87 are not even/or ever, recognized - as they have moved on and are renting out the home that was "given" to them, are using that rent money to pay their apartment rent, gambling on the knowledge that the 'servicer' will not be moving all that fast - the dominoes continue to fall in non-payment of property tax (causing local and state monetary fiascos), maintaining basic home owner's insurance (if they do!), and then those same parents who caused this mess can't retire because they are now raising their grandchldren? This whole fiasco is just a miniscule portion of where we 'baby boomers' are wholly responsible.

  • Report this Comment On December 29, 2009, at 6:12 PM, BMFPitt wrote:

    And I had figured you were just saving this for an end-of-year walk of shame special.

    Fannie, Freddie, the FHA, and all other government props on house prices need to be removed.

    But it's never gonna happen.

  • Report this Comment On December 29, 2009, at 6:13 PM, SonicFoolAz wrote:

    I've really started to loose a lot of respect for the Fool since they began letting anyone write articles under their banner and packaging them as fool articles.

  • Report this Comment On December 29, 2009, at 6:20 PM, 1950BabyBmrWidow wrote:

    Are you saying that Matt Koppenheffer is not a writer for Fool?

  • Report this Comment On December 29, 2009, at 7:41 PM, xetn wrote:

    The title of this article is misplaced. It it the federal government that makes and sets policy for these children. And, it was government's influence along with the actions of the Fed that fueled the sub-prime and housing bubble.

    Please put the blame where it rightly belongs.

  • Report this Comment On December 29, 2009, at 8:00 PM, rd80 wrote:

    Best Walk of Shame yet!

    According to a WSJ article on the pay packages, payment in cash rather than company stock was a critical part of the negotiations. The execs didn't want to be compensated with stock.

    I guess tying incentives to company performance is only for companies not run by the gov't. Some pigs are more equal than others.

  • Report this Comment On December 29, 2009, at 8:27 PM, TMFKopp wrote:

    @fyibob

    Oh yeah, it is a big ol' mess...

    @SonicFoolAz

    I'm not quite sure what you're referring to, I (Matt K. here) have been a writer for TMF since 2006.

    @xetn

    There's plenty of blame to go around, but your point is a good one.

    @rd80

    Thanks! Yeah, the all-cash comp was unbelievable to me after the govt made such a big deal about tying compensation to performance.

    Matt

  • Report this Comment On December 29, 2009, at 8:59 PM, fromunder wrote:

    imo pink slips for all on capital hill. 6million apiece is that a typo. does anyone know how much benanke and giethner are paid. do they only except gold bullion.

  • Report this Comment On December 29, 2009, at 9:02 PM, plange01 wrote:

    lending money to buy homes in a depression....

  • Report this Comment On December 29, 2009, at 9:02 PM, rd80 wrote:

    In case anyone's interested, here's the text of e-mails I just sent to my congress critters.

    I read about the Treasury Department decision to lift the $400 billion cap on support to Fannie Mae and Freddie Mac and am concerned that this is not only continuing the housing bubble, but is unconstitutional.

    By lifting the support ceiling, the Executive Branch has effectively put taxpayers on the hook for an unlimited amount of money. I'm pretty sure Congress hasn't authorized and appropriated unlimited funds for the support of FNM and FRE.

    As FNM and FRE continue to pour good money after bad in the mortgage markets, they also continue to artificially inflate housing prices and set us up for another collapse.

    FNM and FRE need to be wound down and put out of business, not supported with money we don't have.

  • Report this Comment On December 29, 2009, at 9:38 PM, keyjeff wrote:

    Perhaps before making comment, all of you so called geniuses should understand who actually owns both of these entities and why they continue to receive support.

    Geez...

  • Report this Comment On December 30, 2009, at 12:08 AM, rfaramir wrote:

    Good letter, rd80.

    Through FNM and FRE the government (thanks xetn for pointing out the true cause of the troubles) has been stealing our money (through devaluation of the dollar as more is printed to support these execrable institutions).

    Through CRA the government has enabled ACORN to extort money from local banks for undeserving constituents.

    Through Chris Dodd and Barney Frank these organizations have been operating with OUR MONEY, wasting and losing it, while these idiots protected them from scrutiny, and while Frank at least was literally in bed with a CEO of one of them. I don't know what Massachusetts will do with Barney, but Connecticut can get rid of Dodd by electing Peter Schiff. Yes, the very man that was chastised on TV for predicting the mess we're in. Google "Peter Schiff was right".

  • Report this Comment On December 30, 2009, at 7:23 AM, mtracy9 wrote:

    Fannie and Freddie got caught up in the fervor and the same dumb lending practices as the private banks. It executives should have all been axed, just as should have the executives of Morgan, Goldman, and CItigroup.

  • Report this Comment On December 30, 2009, at 7:23 AM, mtracy9 wrote:

    Fannie and Freddie got caught up in the fervor and the same dumb lending practices as the private banks. It executives should have all been axed, just as should have the executives of Morgan, Goldman, and CItigroup.

  • Report this Comment On December 30, 2009, at 9:37 AM, howboutme wrote:

    Its really out of our control.......we can't do anything about it except start a good old fashion revolution. Throughout history, every major problem was only looked at and changed after a revolution took place. The DNP (persuaded by the liberal left) has been successfully bringing the whole country down for decades. Sure we can vote them out and then hope the useless republican party can clean things up, but that always takes time and by then the liberal left regains control. Its a never ending yo-yo that will always force the middle class towards poverty but not extinction. You will continue to exist (barely) but only for their purposes.

    If this administration actually cared about people they would give you the money you work your a_ _ off for and help you live your life rather than take it away from you to force other useless, carefree, live beyond their means people that don't deserve your money in the first place since they think the world exist only for them.

    America is the new world Social Security program. At one point the program will explode in our face and we will be living the life of a third world country. Simple economics: You can't put a dime in the piggy bank every day and take out a dollar at the end of the week. The world does not except IOU's. You can print more money but it all goes toward social service type programs in the end that produce nothing.

  • Report this Comment On December 30, 2009, at 10:18 AM, Tinka82 wrote:

    Fannie and Freddie are the equivalent of spoiled trust fund babies with good old Mums and Daddy (the American taxpayer) obligated to bail their irresponsible butts out.

    This whole GSE business model is ill conceived from the get go if you ask me. No matter how badly they perform, we must bail them out. What impetus would any business have to be prudent and profitable with such a sweet deal? Why would they keep costs contained or turn away profits today that may go sour tomorrow if they know they don't have to answer for these poor business decisions?

    Fannie's latest brain child really makes my tin foil conspiracy theory hat tingle and cause discomfort. They are buying the properties back on the courthouse steps and KEEPING them. Renting them back to the original owners for 12 month periods. Um, wait a minute. This equates to the Federal Government becoming owner of private real estate.

    Fannie, Freddie, or any lender or servicer of mortgages have never been chartered or designed to be holders of real estate, but holders of the notes. The security instrument that is a liquid asset and produces income on a monthly basis. Real estate is an illiquid asset designed to be a long term investment and privately held in our capitalist economy. Fannie and Freddie were created to keep the flow of mortgage money moving in the economy, not to become landlords. I personally believe this is a big part of the reason they now need more money from the treasury as they won't be selling off the assets and producing capital from them, but having to hold and maintain them.

    Were these so called workout programs restructured to make real sense for the borrowers, they'd cram down the principle balance for the underwater homeowner. Play with that interest rate and penalty amount all you want, but if Joe and Nancy Homeowner are paying on a $500K mortgage for a now $300K property, they're gonna walk eventually.

    I can't honestly buy that the financial wizards at Fannie and Freddie are really this ignorant. I'm a lowly real estate appraiser with a handful of economics courses under my belt and can see this pretty clearly. So if they're not that stupid, then what really is thier intent? For the Federal Government to control private real estate? Ouch! There goes my tin foil hat again. I really didn't want to be wearing this thing. I really have fought this whole conspiracy theory thing for a long time, but I'm just not getting any reason to believe otherwise.

  • Report this Comment On December 30, 2009, at 10:28 AM, stonebusted wrote:

    I like to draw simple parralells. A fox or foxes got in the hen house and suprise ate most of the chickens. The government came along and replaced the chickens, but left the foxes in the coop.

    Wonder what happems next?

  • Report this Comment On December 30, 2009, at 10:48 AM, kralz wrote:

    This should be called a "inneficiency subsidy"

  • Report this Comment On December 30, 2009, at 10:49 AM, jpsauvage wrote:

    The Christmas Eve Fannie/Freddie announcements add to the rash of TARP-funded government-approved executive compensation that is making the mob skim in 1950s Las Vegas look like amateur hour.

    Our gold has been quietly stolen by corporate America, with a good part of the ill-booten gotty used to buy politicians who then eliminated effective oversight, accelerating further extraction of our diminishing gold. The American middle class, an unwilling key element of this “golden helix”, has now disappeared up its own deposition at the speed of light.

  • Report this Comment On December 31, 2009, at 8:32 AM, carjjc wrote:

    I am considering purchasing some of this stock. You point out your opinions about how you feel about the government. This is not a concern of mine. I want to know if I can make money with this stock?

    With all the government money is the stock a buy?

    jc

  • Report this Comment On January 01, 2010, at 12:48 PM, rd80 wrote:

    @carjjc - The gov't lifeline backs Frannie debt, not the stock. The primary reason for lifting the support caps is to cover massive losses that will be incurred propping up the mortgage markets.

    Some skilled/lucky traders will make money on FNM/FRE, but I think longer term these stocks are headed much lower.

    The two CEOs have such a high opinion of their company stocks that they wanted all cash pay packages, no stock. IMHO, that tells us all we need to know.

    Happy 2010!

  • Report this Comment On January 01, 2010, at 2:30 PM, ddmac380 wrote:

    Robert Holmes of Boston recently described Fannie & Freddie this way,

    "Bose George, an analyst with Keefe, Bruyette & Woods who downgraded both stocks to underperform and cut the price targets to zero in October, says it is a very telling sign that both CEOs were not given stock as part of their compensation. The obvious reason, George wrote in a research note, is that "the shares have no long term value and that no executive would accept unvested shares of the companies as part of their compensation package.

    This reinforces our view that the common shares will eventually trade to zero." For those still daring enough to ride the zombie wave higher into 2010: I'd like to introduce you to some Washington Mutual, Lehman Brothers and General Motors shareholders."

    Both are "zombie stocks". They are dead, they just don't know it yet!

  • Report this Comment On January 03, 2010, at 10:01 PM, b3skins wrote:

    stock will never trade at zero, these stocks will be around as long as houses, as long as we have real estate agents, .......so, if it sells for next to nothing now--it has no where to go but up. I believe the stock will do fine in the long term however at a great cost to the American tax payer.

  • Report this Comment On January 04, 2010, at 4:42 PM, carjjc wrote:

    I appreciate that the CEOs dont want stock. These people may be good at running the company but they may not understand when the stock is a value. I dont see the CEOs decision as a rating on the stock. If the government keeps them alive it seem likely they will make money and at some point the stock should be a buy. The question to me is When?

    jc

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