The Craziness Continues for Fannie Mae and Freddie Mac

Fannie Mae and Freddie Mac delivered billions in income, but that wasn't the biggest news surrounding the two this week.

May 12, 2014 at 12:06PM

Another week is in the books. And the same story continued of news good, bad, and ugly for Fannie Mae (NASDAQOTCBB:FNMA)Freddie Mac (NASDAQOTCBB:FMCC)and their shareholders.

Fnma By Future Atlas

Source: Flickr / Future Atlas.

The good
On Thursday, May 8, investors learned the dollars continued to flow to Fannie Mae. It reported comprehensive income of $5.7 billion through the first three months of the year, its ninth consecutive quarter of recording a quarterly profit.

And what's also quite remarkable is the government-sponsored enterprise had $4.1 billion in revenue from legal settlements, nearly double the $2.2 billion it received in all of 2013. Undoubtedly the money continues to flow to it.

Freddie Mac also delivered a great quarter, as its net comprehensive income stood at $4.5 billion, the 10th quarter in a row in which is saw a profit. It recognized a huge gain from legal settlements with banks and other financial institutions, as it drew in a staggering $4.9 billion in benefits from legal settlements.

More than $10 billion in comprehensive income is undoubtedly a good thing. But that wasn't the only news Thursday.

Capitol Building By Ttarasiuk

Capitol Building Source: Flickr / ttarasiuk.

The bad
Later in the day, media outlets began reporting that the discussion surrounding the Johnson-Crapo bill was collapsing on the Senate Banking Committee.

Last week, lawmakers delayed the committee vote on the bill aiming to overhaul Fannie and Freddie, as the proponents of it were aiming to pass it with a "supermajority" to ensure it passed, and in turn put to a floor vote before the mid-term elections. As a result, those hoping to pass the bill have been seeking to ensure half of the six uncommitted Democrats vote in favor of it. 

While some are confident it will pass, many have begun to wonder if the true future of Fannie and Freddie won't be addressed until 2015 as a result of the delay.


Warren Buffett in Omaha.

This news also followed remarks from well-known and well-respected investors Warren Buffett and Charlie Munger who suggested either a system suggested by Sens. Johnson and Crapo -- in the case of Buffett -- or the current GSE structure -- from Munger -- are best. In fact, the direct quote from Munger suggested the "experiment was a total failure," when he ended the discussion on the old privatized structure of Fannie and Freddie.

The ugly
Lastly, it's critical to mention, although it wasn't this week, on the last day of April, the Federal Housing Finance Agency released its stress tests of Fannie Mae and Freddie Mac. Those revealed that under the worst-case scenario, with a housing and economic collapse, the potential losses would be a staggering $190 billion, which was more than the $187.5 billion received during the last financial crisis.

Also, although the two firms still earn remarkable sums, for the purposes of shareholders, the two GSEs had net income totaling $9.3 billion, a total of $10.2 billion was returned in the form of dividends to the Treasury instead of shareholders.

While some may think the possible delay of the overhaul bill is a good thing, and the future for shareholders is bright, it's critical to remember as it currently sits, no matter how good the results are for the companies, shareholders still see none of it.

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. Every year, The Motley Fool's chief investment officer hand-picks one stock with outstanding potential. But it's not just any run-of-the-mill company. It's a stock perfectly positioned to cash in on one of the upcoming year's most lucrative trends. Last year, his pick skyrocketed 134%. And previous top picks have gained upwards of 908%, 1,252%, and 1,303% over the subsequent years! Believe me, you don't want to miss what could be his biggest winner yet! Just click here to download your free copy of "The Motley Fool's Top Stock for 2014" today.

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4 in 5 Americans Are Ignoring Buffett's Warning

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Jun 12, 2015 at 5:01PM

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