Warren Buffett Is Ready to Replace Fannie Mae and Freddie Mac

Another major name  has weighed in on the future of Fannie Mae (NASDAQOTCBB: FNMA  ) and Freddie Mac (NASDAQOTCBB: FMCC  )  . And this billionaire's response may surprise you.

Surprising remarks
Warren Buffett of Berkshire Hathaway (NYSE: BRK-A  ) (NYSE: BRK-B  ) is one of the few in finance who grabs more headlines than Fannie and Freddie.

But fewer people remember Buffett once owned shares of Freddie Mac. At the end of 1999, Berkshire Hathaway had a position worth $2.8 billion, which netted a nearly 10-fold return its $300 million investment. Therefore, it's easy to think Buffett may one day be open to joining the other big names like Bill Ackman and buying a chunk of Fannie and Freddie shares.

But Buffett said plainly in a recent conversation with Bloomberg Television's Betty Liu [emphasis added]:

I don't see any role for Berkshire in Fannie or Freddie. There could be some in some housing arrangement that gets worked out in the future.

It's also very important remember he sold almost all of his position in 2000, Berkshire's ownership in Freddie fell from 8.6% to 0.3%,

Unlike Bill Ackman and Bruce Berkowitz, it's clear Warren Buffett has no interest investing in Fannie and Freddie.

But that doesn't mean Buffett has no interest in the future of housing finance.

The reality of reform
Here's what the Bloomberg report had to say:

Warren Buffett...said he's open to the possibility of his company eventually becoming more involved in housing finance once U.S. lawmakers resolve the future of Fannie Mae and Freddie Mac.

Much of the discussion surrounding Fannie and Freddie has focused on the eventual winding down of the two government sponsored entities. The oft cited Johnson-Crapo bill calls for the eventual replacement of Fannie and Freddie with a "Federal Mortgage Insurance Corporation," which would be a guarantor of a slice of the mortgages that private companies hold. 

How does this apply to Buffett and Berkshire Hathaway?

At it's core, Berkshire Hathaway is an insurer, and in the last year alone it had almost $8 billion in pre-tax income from its insurance operations. Also consider its Clayton Homes unit currently owns and services nearly 330,000 mortgages worth $13.6 billion.

If the Johnson-Crapo bill is passed and the FMIC is established, it calls for the first 10% of losses on mortgage backed securities to be covered by private capital. Berkshire Hathaway could easily establish itself as a key player in the private insurance of mortgages, as it has distinct expertise in both insurance and the mortgage market itself. 

By taking a small slice of each mortgage payment in exchange for insurance on the mortgage-backed securities which are issued, Berkshire could increase the capability and profitability of its insurance operations.

One has to wonder if Warren Buffet and Berkshire Hathaway already realize this and are hopeful Fannie and Freddie are indeed wound down, then they can step in and provide returns to shareholders instead of the government.

The greatest thing Warren Buffett ever said
Sure Buffett once owned Fannie and Freddie, but he knew when to sell it to make his billionss. But the thing is, he's happy to share his investing wisdom, and he in fact wants you to be able to invest like him. Through the years, Buffett has offered up investing tips to shareholders of Berkshire Hathaway. Now you can tap into the best of Warren Buffett's wisdom in a new special report from The Motley Fool. Click here now for a free copy of this invaluable report.


Read/Post Comments (7) | Recommend This Article (3)

Comments from our Foolish Readers

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  • Report this Comment On April 28, 2014, at 1:09 PM, smauney wrote:

    I think the Bill has a provision limiting how much of the market a big bank can have in loan underwriting, but the Bill has no provision on how much of the market a mortgage insurance company can have. Isn't that special.

  • Report this Comment On April 28, 2014, at 1:13 PM, smauney wrote:

    Big government being replaced by big banks and big insurance. Obama, friends and family are set for life.

  • Report this Comment On April 28, 2014, at 1:36 PM, TomHigley wrote:

    You can see the hand writing on the wall. The politicians are clearing the way with the uncalled for and unnecessary winding down of F&F for the fat cats like Buffett to step in. The level of corruption in our government is disgusting.

  • Report this Comment On April 28, 2014, at 1:49 PM, smauney wrote:

    It's like watch Stephen and Calvin Candie in Django Unchained. Who is running the show?

  • Report this Comment On April 28, 2014, at 11:40 PM, maestrolindo wrote:

    This bill is a scam. Michael Bright, a former Countrywide Financials executive, wrote this bill for Bob Corker. It accomplishes nothing more than wiping out Fannie Mae and Freddie Mac shareholders for the benefit of the London insurance markets and select US banking interests. This system has worked well since 1930's until Congress pumped the sub prime and originating lenders (banks) compromised underwriting standards. They dumped toxic loans on the secondary mortgage market. Fannie and Freddie had nothing to do with the crisis!

    Congress has hid behind the guise of 'protecting the taxpayer' and their Federal Mortgage Insurance Company proposal leaves taxpayers on the hook for 90% of losses in the event of a future crisis. I have been following this scam since 2008. The amount of corruption is ridiculous. This has nothing to do with helping Americans. The government wants to sweep Fannie and Freddie under the rug before the unconstitutional property sweep of shareholder equity as well as securities fraud and insider trading related to equities of both companies committed by the Treasury and FDIC becomes common knowledge to the public.

    The bottom line is nothing changes for taxpayers and homeownership will become more expensive. Seriously.. read what this bill actually does and compare it to our current system. The risks inherent to restructuring a 5.4 trillion system need to be worth SOME reward. I predict pain for all if this actually make it through the Senate and House.

    Scam through and through and worse than Obamacare.

  • Report this Comment On May 05, 2014, at 11:34 PM, adasand wrote:

    I have respect for Ackman, but I think he might be wrong on Fannie and Freddie.

  • Report this Comment On May 08, 2014, at 11:03 AM, truthwillsaveus wrote:

    You should hope he's right.

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