2 Big Moves Show the Future Direction of Fannie Mae and Freddie Mac

Fannie Mae and Freddie Mac are under new leadership, but out with the old, in with the new, seemingly doesn't apply here.

Jan 23, 2014 at 7:00AM

Mel Watt has been at the helm of the Federal Housing Finance Agency, the conservator of Fannie Mae (NASDAQOTCBB:FNMA) and Freddie Mac (NASDAQOTCBB:FMCC), for about two weeks, and his first two moves already show where the companies may be heading.

Fnma By Future Atlas

Source: Flickr/Future Atlas.

While the appointment of Watt was met with some dissension and even required the changing of the filibuster rules for presidential appointments, Watt was sworn in on Jan. 6 to oversee the government agency. His duties will extend beyond the oversight of the two government-sponsored entities, but that role will be an important part of his obligations in his current post.

Following his appointment, Watt said, "Today's housing finance system is one of the keys to our economic recovery, and I am grateful for the opportunity to help develop a strong foundation for moving this system forward for the benefit of all Americans at this critical point in our nation's history." 

But when it comes to the actual day-to-day operations of Fannie and Freddie, Watt has also announced two big changes.

Two shifts
In just his third day on the job, Watt announced the decision to delay the increase in the fee that the two entities charge to guarantee mortgages, which outgoing director Edward DeMarco said was being used to "provide better protection of and return to taxpayers, who are providing the capital support that keeps these companies operating." DeMarco also noted that the increase of the fees was to also "encourage" more private capital to begin moving into the mortgage market. 


Mel Watt

When you consider that the FHFA oversees the GSEs of Fannie and Freddie as well as the 12 federal home loan banks that in total provide more than $5.5 trillion in funding in the mortgage market and to banks and other financial institutions, encouraging more private investment is undoubtedly a good thing.

About one week later, the FHFA also announced that Fannie Mae is close to the completion of its second Connecticut Avenue Securities, or C-deals, transaction, which effectively allows institutional investors to invest in the credit risk of mortgages that Fannie Mae retains on its books. This move essentially helps manage and transfer the risk posed to Fannie Mae by bringing in private investment.

Of the new transaction, Watt said, "This and other risk-sharing transactions undertaken by Fannie Mae and Freddie Mac provide valuable insight as to how to restore private sector participation in housing finance and reduce losses for taxpayers."

Why they matter
Notably absent from all of Watt's remarks in his first two weeks on the job is any language or consideration about what these moves may mean to the investors in the publicly traded preferred and common shares of Fannie Mae and Freddie Mac. In fact, he cites the benefits the moves bring to the broader American public, taxpayers, and other private investors.

In the investor presentation on the C-deals transaction, Fannie Mae notes that it has five commitments, none of which relate to its investors:

Source: "Fannie Mae's Approach to Single-Family Credit Risk Management."

It is vital to remember that Fannie Mae noted in its most recent annual report, "Because we are in conservatorship, we are no longer managed with a strategy to maximize shareholder returns," and "every dollar of earnings that Fannie Mae and Freddie Mac generate will be used to benefit taxpayers for their investment in those firms."

While it has only been two weeks, Watt is showing that the two entities are not suddenly going to be working for the benefit of shareholders, and anyone with an investment in the company should always keep that in mind.

One stock worth buying this year
There's a huge difference between a good stock and a stock that can make you rich, and there is no denying Fannie and Freddie had incredible runs in 2013. But there is one company that could be poised for a similar run in 2014. The Motley Fool's chief investment officer has selected his No. 1 stock for 2014, and it's one of those stocks that could make you rich. You can find out which stock it is in the special free report "The Motley Fool's Top Stock for 2014." Just click here to access the report and find out the name of this under-the-radar company.

Fool contributor Patrick Morris and The Motley Fool have no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at www.fool.com/podcasts.

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to www.fool.com/podcasts, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.


Compare Brokers