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

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.

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.

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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 January 23, 2014, at 10:29 AM, smauney wrote:

    With the recent settlements concerning mortgage backed securities, like JP Morgan paying back $13 Billion etc..., and passing of the Dodd-Frank Act - I believe the FNMA & FMCC will ultimately have to assume more responsibility in the market place. You can't put the screws on the big banks and wind down FnF at the same time. Take the Warner Corker bill - anybody can set down and come up with a plan; the real genius is making it work. Now every week a new group of Senators are coming up with a different plan, which shows me that there's a problem because they can't figure out how it's going to work. Because Dodd-Frank is putting more of the onus on the banks - if Washington somehow does wind them down they will have to create the same exact thing to take their place. The Senators are chasing their collective tales. Maybe the finance / hedge fund managers are correct. They have already screwed up Healthcare. Don’t bring down the global economy just because of ignorance. Otherwise, you’ll be turning to the private sector again to bail you out.

  • Report this Comment On January 23, 2014, at 12:21 PM, Caludio wrote:

    No politician will stand for shareholders. They fear to lose votes if they do it.It is all about electoral marketing so they will wait for the order from the Court and then they will stop the robbery on shareholders. They think that all shareholders are vulture funds.

  • Report this Comment On January 23, 2014, at 4:15 PM, smauney wrote:

    I always hear that taxpayers bailed out FNMA & FMCC. Funny, because at one time in their lives 90% of taxpayers have had home mortgages that have been purchased by FNMA & FMCC. So essentially the taxpayers were bailing out themselves. If politicians don't figure this out and end up destroying home mortgage liquidity there will be heck to pay.

  • Report this Comment On January 24, 2014, at 12:38 PM, hikingviking wrote:

    Sure! Let's just get rid of the rule of law and then the elected officials can do whatever they want whenever they want. Pretty much what the current administration is doing right now under executive order in a multitude of ways anyway. Some day the government may even take over the Motley Fool because they don't like what they say. You know, for the good of the order under some 'fairness act'.

    If the elected officials can seize Fannie and Freddie precipitated via their own failed policies, then we are indeed living in a decaying society. Fannie and Freddie have returned all monies loaned to them through the Paulson scheme (unlike GM $10 B loss). The elected officials are now trying to craft a way to unlawfully and permanently seize Fannie and Freddie to redistribute their earnings to suit the whims of the governing body. Maybe even to fund the failing Obamacare.

  • Report this Comment On February 04, 2014, at 12:17 PM, Jclydemyres123 wrote:

    I have been self employed 55 years the last four years the Gov. has taken two of my Assets and Natiolnized them both FNMA & GM The Gov. Restored GM with tax money then gave half the GM Owenership to the trade union that broke them in the first place I will trade my President for Putin from Russia any time. Mr Putin knows socialism doesn't work. I look for Mr Obama to start moving the homeless in with me and my wife of 67 years.

    Have a good Day I voted for Mit Romney Former Horse Soldier Jacob C. Myres

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