Why This Bill Doesn't Change the Fannie Mae and Freddie Mac Thesis

A few weeks ago when more details about the Johnson-Crapo bill were released, shares of Fannie Mae and Freddie Mac curiously tumbled nearly 40%. Did the details of this bill really change the investing thesis when it comes to Fannie and Freddie?

In this segment of The Motley Fool’s financials-focused show, Where the Money Is, banking analysts Matt Koppenheffer and David Hanson discuss the recent events impacting the GSEs, Janet Yellen's flub, and ignoring the broader market. 

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  • Report this Comment On March 24, 2014, at 11:07 AM, AmyQrs2014 wrote:

    I have following comments about the proposed bills and recent news on FMCC and FNMA.

    1) From news onlined, I found some people do not understand purpose of setting up these 2 companies, and what kind of business they are involving. Some people do not understand why to package and sale the products that investors already invested to investors again. Many people think the government did not properly use tax payer’s money, when the government bailout these 2 companies.

    I think purpose of setting up these 2 companies is to provide liquidity to big FIs in mortgage business. They release some big FIs from mortgage lending. Then, these FIs can initiate or work on other new projects. FMCC and FNMA products can also allow individuals and smaller companies to benefit from the return of bigger projects.

    But, I think these 2 companies should consider more strict credit police and improve their management to - only serve suitable projects and suitable companies at suitable prices when the market condition is proper.

    They should not avoid the role of being a market watcher and maintaining certain discipline in the market. They can treat the role as a CSR project or develop the role into their legal responsibility.

    They may consider to separate first tier and second tier mortgage projects, let other companies know that they will postpone some projects when the market condition is bad and reject bad quality projects. So that property developers, investors and lenders will take certain responsibilities of property investment and development, rather than just transfer all risk to these 2 companies and other parties.

    The public should understand their - Because of sufficient money supply and funding channels in recent years, many FIs tend to keep good mortgage projects, and only outsource bad projects. This makes these 2 companies more difficult to get a proper return, their projects and business more risky.

    In addition to their existing business, these 2 companies may consider to expand into other suitable business and product sectors.

    2) Some news also mentioned that some people suggest to Replace the FMCC and FNMA with Mortgage insurance company, and bailout only when investors’ loss is more than 10%.

    I think mortgage insurances have different function and purpose with existing FMCC and FNMA products. They are like peach and orange. The situation is like when people fall ill, after eating some bad peaches during bad weathers, they should not ask God to replace all peaches with oranges.

    The US government did not always bailout FMCC and FNMA. This probably is the first time to bailout FMCC and FNMA in 10 to 20 years, or since their establishment.

    It is not a good idea to benefit from the companies during their good years, and your rainy days. Kick them away, during their rainy days, but your good years.

    3) The companies were set up some years before. It is certainly a good idea to continually perfect and develop their business and operation. But it seems not a good idea to crackdown everything and start from zero.

    4) Big Bath accounting treatment.

    From accounting prospects, some company write off uncertainties in their financial statement in 1 year to have high quality financial statements in future. i.e. Revaluation surplus that accumulated during many good years, or slow debt collection. Many good blue chips companies do things in this way.

    In addition, 2009 is a very special and bad year. In 2008 and 2009, economy, property and financial market in many major developed countries including US slumped, after conservative growth in 10 or 20 years.

    These may be the reasons for these 2 companies recorded serious loss in 2009.

    If people do not understand why the company recorded serious loss, they should first read the financial statements and ask the companies, etc.

    5) People should first understand purpose of setting up the company, what benefits and real contributions does the company bring to the society.

    It is not a good idea to benefit from the companies during their good years, and your rainy days. Kick them away, during their rainy days, but your good years.

    6) If the proposed bill is 500 pages, any proposal against the bill and improve/develop the companies and the system could be 1000, 1500 or 3000 pages. It is too difficult to summarize all my comments here.

    Any feedback, pls email me:

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Matt Koppenheffer

Matt is the Managing Director of The Motley Fool GmbH, The Fool's German business. Besuch uns bei!

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Related Tickers

9/2/2015 3:59 PM
FMCC $2.25 Down +0.00 +0.00%
Freddie Mac CAPS Rating: **
FNMA $2.35 Up +0.00 +0.00%
Fannie Mae CAPS Rating: **