What Should the Government Do With Fannie and Freddie?

Join the Fool for a talk with Chris Mayer, who is the Paul Milstein Professor of Real Estate at Columbia Business School. Mayer is also a visiting scholar at the Federal Reserve Bank of New York, and the co-director of the Richard Paul Richman Center for Business, Law, and Public Policy. His research has delved into topics such as housing cycles, mortgage markets, debt securitization, and commercial real estate valuation.

No one, including Mayer, knows for sure what the government will do with Fannie Mae  (NASDAQOTCBB: FNMA  ) and Freddie Mac  (NASDAQOTCBB: FMCC  ) next, but he does have some news from D.C. on the Corker-Warner bill and how he would like to see the situation handled.

Full transcript below.

David Hanson: Before we started filming, you mentioned you were down in D.C. talking, I'm assuming, about GSE reform. I guess my questions would be, what do you think the government should do with Fannie Mae, Freddie Mac, and what do you think they actually will do with them?

Chris Mayer: Should do is easy for an economist to answer. Will do, even the best political scientists don't know the answer to that question.

The should do part: I think the Corker-Warner bill is a really good start on the legislative front. It fits the basic principles, which is it's a path for the U.S. government to withdraw its footprint and it's such that lenders who are in the market are going to bear some risk associated with the mortgages that they make.

To my mind, that's one of the big problems, is when you have a lender making a loan where they have no stake in the outcome... we know that the "Heads, I win, tails, taxpayers or somebody else loses" -- even if it's not taxpayers -- is not a very good lending model. To my mind, that's a really good approach to thinking about GSE reform.

Will it happen? At the panel today, Sens. Corker (R-Tenn.) and Tester (D-Mont.) both said, "Yes, we think there's a real shot at getting this out of the Senate, and even having the House pass something." But I'm no prognosticator. I certainly... betting on progress in D.C. strikes me as one of the more challenging kind of bets for anybody to make, especially an economist.

Hanson: We're an investment company, and there's been some investors out there -- Bruce Berkowitz, some retail investors -- that have come out and bought the preferred shares of Fannie and Freddie, and also the common... What do you say to those people? Do you think that's a reasonable bet, or do you see that as a straight-up gamble?

Mayer: Look, the U.S. government has all sorts of rules about how they can pull all the profits out of Fannie and Freddie.

This is really a bet that you're not going to see GSE reform that wipes them out, and -- and it's a big and -- also that the way conservatorship was set up was done in a way that was not going to pass muster, so their litigation is going to prevent the federal government from scraping all the profits and moving it back into the Treasury, so it's a two-pronged bet.

I'm not a lawyer. I have no view as to whether conservatorship was done in a way that would allow this to happen or not. The political process, frankly, I think most Americans do think Fannie and Freddie should be eliminated, so on that vote I know what the political pressure is.

But if the bet is that nothing will happen in D.C., there are many, many people who have done very well on the bet that, even if something should happen in D.C., that it actually won't. There's always a reasonable chance on that.

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Read/Post Comments (11) | Recommend This Article (4)

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 October 12, 2013, at 10:40 AM, taintedfud wrote:

    everybody knows how to get rid of fnf, no one seems to know how to replace it. c-w just craters it. i did not think testor has a proposal on the table.

    dr mayer, what replaces fnf? who places all those loans? you have a solution without a solution.

    tainted fud

  • Report this Comment On October 13, 2013, at 7:21 AM, Dadw5boys wrote:

    The Government should tell the American People the truth that Fannie did not write those bad sub prime loans ! The bad sub prime loans with forced on them from the over 900 failed Banks the FDIC had to close.

    The FDIC would have gone Bankrupt !

    Those bad sub prime loans should have been sent back to the originators with payment demands and people who broke the law jailed !!!!!

    When the banks crashed Fannie only had .04% in bad loans on their books which is a very very low rate !

  • Report this Comment On October 13, 2013, at 7:26 AM, Dadw5boys wrote:

    Fannie needs to stay and protect consumers ! They also pay billions into the U.S. Treasury each year.

  • Report this Comment On October 13, 2013, at 9:52 AM, peckbill wrote:

    Shut them down

  • Report this Comment On October 13, 2013, at 12:51 PM, notafool2013 wrote:

    The problem here is if the risk taken is well compensated or not. As a taxpayer, I am happy about 90% return collected from Fannie so far. The Congress should concentrate more on solving the National Debt problem and leave Fannie alone for now. The US Congress can use some helps. We should send a big army of CPAs to the US Congress to balance the book.

  • Report this Comment On October 13, 2013, at 2:58 PM, infinitemf wrote:

    Looks like Chris Mayer is big Motley Fool.

    Chris Mayer says most of the Americans want to shutdown FnF. How did he come to this conclusion?

    Did anybody conduct national survey? If that is the case how FnF are thriving post 2008 crisis and investors are investing FnF securities?

    The reality is the other way around, Most of the lawmakers and Americans want to preserve FnF, because there is no other viable alternative.

  • Report this Comment On October 13, 2013, at 10:20 PM, bruce4323 wrote:

    they can't fix the post office how are going to fix the GSE's

  • Report this Comment On October 14, 2013, at 8:52 AM, thombiz wrote:

    Within the past two weeks, FHFA directed fnf contribute money equally to create a new corporation called Common Securitization Solutions LLC to handle some of the "back office" work of fnf. Since the FHFA is making this happen then it should follow that FHFA sees a need to keep fnf alive and well. It should also follow that Common Securitization Solutions will be able to provide services to financial institutions other than fnf. Any attempt to shutter fnf will be met with resistance and even if fnf is "politically" shut down, fnf still owns Common Securitization Solutions. It follows that fnf stock would be converted to stock in CSS.

  • Report this Comment On October 14, 2013, at 11:32 AM, Caludio wrote:

    Buying FnF common stock is an excellent investment. It is like buying an option with no expiration date. This stock is worth $50 .

    I have been reading about FnF for the last six months and come to the conclusion that there are only two people writing articles with biased negative opinion : Tom Dorsey ( seeking alpha)and Matt Koppenheffer-David Hanson(with the Motley Fool). These are the only two authors out of hundreds that have a negative view on the stock. Both of them disclaim that they do not have positions on the stock. However they keep saying always the same. Because they constantly repeat the same thing it looks like a "campaign". Also some occasional reader may think that there are a lot of guys with negative opinion but if you review carefully the internet in the last six months you will find that only these two authors are the ones with a biased production.

    If you really want to make a good decision I suggest that you read the lawsuits and comments of lawyers or law professors . If you believe in the American justice system then you will have a different opinion that these guys.

    There are several lawsuits, to have a good idea of what is going on I suggest that you read at least three: Washington Federal Vs US ( lawyers are Hagen Berman) ; Perry Capital Vs US ( lawyers Gibson Dunn's Ted Olson ) and a derivative lawsuit Fisher Vs US. All other lawsuits are very similar to some of these and will be consolidated with these three.

  • Report this Comment On October 14, 2013, at 6:20 PM, TMFHurricane wrote:

    Hey all,

    We are certainly not trying to bash an investment in common shares in Fannie or Freddie, but simply trying to help investors understand the unique circumstances surrounding the two entities. An investment here is much different than one in a business that has a fiduciary duty to shareholders. This isn't necessarily a worse investment, but different. Putting a "value" on the shares is possible but obviously predicated on the probability of reprivatization. Like Mayer suggests, he thinks the status quo is usually the best bet in Washington (again, just his opinion). Again, no vendetta against investors here, if there is opportunity and the you believe the probabilities for success lean in your favor, more power to you! Thanks for the comments -- this is what the Foolish community is as all about!

    -David Hanson

  • Report this Comment On October 14, 2013, at 10:20 PM, Caludio wrote:

    To David Hanson

    FHFA as conservator has a fiduciary duty to shareholders. Also the US treasury as major shareholder has a fiduciary duty to the minority of shareholders. What happen here is that both FHFA and US Tresury have breached their duty and now is time for the Court to fix the problem.

    Read the articles of Bryndon Fisher. Just google

    "Bryndon Fisher".

    As a journalist you should be informed of it and you should inform to your readers what is going on in the Court otherwise you are misleading people. If you are trying to help investors to understand this unique circumstance you have to explain the whole picture instead of only one side.

    So far all your articles are biased. Not a good thing for your carreer ,not a good thing for those who may trust your opinions.

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