What's Next for Fannie Mae and Freddie Mac?

The Federal Housing Finance Agency (FHFA), the federal regulator charged with overseeing Fannie Mae (NASDAQOTCBB: FNMA  ) and Freddie Mac (NASDAQOTCBB: FMCC  ) , recently announced a plan to reform the housing finance market. The plan calls for establishing a new securitization platform. How the plan will actually work in practice is unclear, so I think investing in the common stock of the housing finance giants is not worth the risk of uncertainty.

What's the plan?
The FHFA's plan aims to resolve the problems that initially welled up in the subprime mortgage market and triggered the economic crisis in 2008. In September of that year, Fannie Mae and Freddie Mac were placed in an FHFA-run conservatorship by the Treasury Department -- essentially nationalizing a key financing piece the housing market. And they are still there today.

Now, the FHFA has filed paperwork to create a new securitization platform. This new entity, Common Securitization Solutions (CSS), is described as an "equally owned subsidiary" of Fannie Mae and Freddie Mac. My take is that CSS will be a potential replacement for the agencies and could consolidate some of the functions considered to be redundant.

While the goal may be to replace the agencies, the question remains as to how to get this done. The agency's announcement offered little guidance and lacks assurances taxpayers will not be bailing out the institutions in the next crisis.

This step comes as congressional lawmakers wrangle over the government's involvement in the mortgage market. House Republicans are calling for the elimination or privatization of Fannie and Freddie, while a Senate bill (the Housing Finance Reform and Taxpayer Protection Act of 2013) would leave some form of federal backstop in place. 

What does it mean for investors?
These developments create uncertainty, and this not a good situation for ordinary investors. The government takeover has really been another bailout paid for by the taxpayers. And I believe the turf battle on Capitol Hill will hinder the FHFA's plan. With so much cash at the fingertips of lawmakers, it's uncertain if the CSS will ever be a completely private outfit.

Moreover, Fannie and Freddie are not being run for the benefit of shareholders but rather the government and taxpayers. This is made quite clear in Fannie Mae's financial reports.

That being said, last year and 2013 have been profitable years for both enterprises. This is mostly due to the slow rebound of the housing market. But even though Fannie Mae and Freddie Mac have paid a significant sum to the Treasury, thanks to a 2012 amendment to the government's preferred stake, the path to fully repaying the government investment and exiting conservatorship is murky at best.

The bottom line
The FHFA's plan might not be bad news for institutional investors in the preferred stock. If there's money to be doled out after the CSS is up and running, preferred shareholders of Fannie and Freddie will be paid before common shareholders. 

In short, it's unclear what the valuation of the common shares will be over time. So, I think this is an easy pass for ordinary investors considering placing a bet on the common. In the end, this is only the beginning of the long goodbye of Fannie Mae and Freddie Mac.


Read/Post Comments (7) | Recommend This Article (1)

Comments from our Foolish Readers

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  • Report this Comment On November 02, 2013, at 8:35 AM, HyoJaelee wrote:

    The author of this article is simply a real fool. This is old news that want to pass on to readers as new. Isn't there anything else to write about? Stop beating a dead horse! Some fool probably lost money or trying to make money shorting this stock. Move on already and let pole make real decisions instead of fooling them with continuous nonsense over and over.

  • Report this Comment On November 02, 2013, at 8:56 AM, infinitemf wrote:

    When it comes to counting risks to tax payers, why is that media, journalists and politicians only consider FnF as potential risks to tax payers?

    How is that only FnF pose risks to tax payers and not other big fraudulent players in the financial as well other sectors?

    The biggest risks to taxpayers are fraud / ponzi schemes in the economy and specifically in financial sector. FnF are GSEs regulated by USG, and work with only legitimate financial institutions, so the risks are minimal. This why big banks are paying back billions to FnF. The payback is more than the bailout money given to FnF.

    FnF also have the additional social responsibility unlike other companies in private sector.

    During 2008, USG forced bailout money on FnF (FnF were not bankrupt and not insolvent) and used FnF backstop to save and stabilize the financial sector and national economy.

    FnF were shareholder owned public companies in private sector with no USG ownership and no USG guarantees. Why does anybody thinks it is ok to sieze the solvent public companies (FnF) for the fraudulent acts of others and blame FnF. Is it not cover-up to shield the guilty?

    In the last few quarters FnF have been declared profitable for fore seeble future and almost paidback all USG money. So Is it not the time to end FHFA C'ship, and return FnF to legitimate owners (common shareholders).

  • Report this Comment On November 02, 2013, at 10:48 AM, JePonce wrote:

    For decades the U.S. Treasury Department, and the bi-partisan Congressional Office has warned of the this corrupt GSE and has recommended privatization, but Fannies has been a Democrat tool to make Democrats rich...James Johnson, Franklin Raines, Jamie Gorelick, and many, many more.

  • Report this Comment On November 02, 2013, at 11:41 AM, pharmahero782 wrote:

    there are so may bashing lies about FNMA because shorts and hedgefunds want to so short to make money. Motley Fools is one of the forum which works with hedgefunds and shorties to spread lies and put fear in long investors. These bad characters want investors to sell so they can make money

  • Report this Comment On November 02, 2013, at 2:27 PM, HyoJaelee wrote:

    Pharmahero is right. Every time the stock goes up, fools from Montley rush to post old articles. They basically copy and past the same thing over and over. People already know the facts about this stock. They are not investing blindfolded. Bashers just want to cash in on some of the profit by shorting the stock.

  • Report this Comment On November 02, 2013, at 2:36 PM, notafool2013 wrote:

    If the changed result can build a solid, profitable, and efficient system, I don't see why not. Fannie and Freddie both own 50 percent of this new entity.

    If the current internal reform can continue with the right direction, I don't see why the further US Congress involvement is needed. Killing Fannie and Freddie will kill the economy. For a $250,00 loan amount on a 30-year loan with 4% fixed rate, 2% - 3% extra means $305 - $470 extra mortgage payment per month.

    For people live in the areas with high property values, you can probably expect to pay $610 - $940 extra if not lucky. A lot of people in California, New York, Hawaii, Alaska, and Guam will get hit big time.

    Interest rate is expected to go up and Fed can not implement the QE policy forever. Young people are trapped on the student loan payment and can not have a decent deposit to buy a house. To make it worse, baby boomers are prepared for selling the big house to enjoy the retirement life.

    I hope these policy makers know what they are doing. Please do no harm to our fragile economy!

  • Report this Comment On November 02, 2013, at 7:36 PM, Caludio wrote:

    WARNING : THIS ARTICLE IS WRONG ADVISE FOR INVESTORS.

    The article itself is nothing, just old news that everybody knows but the advise is wrong and dangerous because it may lead someone to short the stock and get crushed .

    This stock is worth $50. Fannie is making 40B per year. The lawsuits will stop the sweep amendment and restore the dividends to shareholders as soon as US Treasury gets paid the 187B of the "so-called bail out". Already 147B have been paid back and the balance will be paid sooner than everybody expects.

    Within a few months a Distric Court will order the shares to be re-listed in NYSE and they will skyrock.

    I dont know what this author means by "ordinary investors" , maybe retail investors? ...I dont know... but whoever you are DO NOT SHORT THIS STOCKS because it is a dangerous thing.

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