What You Missed About the Future of Fannie Mae and Freddie Mac

Fannie Mae and Freddie Mac jumped on the recent speech from Mel Watt, but investors may have missed the troubling reality of the two government-sponsored entities.

May 14, 2014 at 8:45AM

Fannie Mae (NASDAQOTCBB:FNMA) and Freddie Mac (NASDAQOTCBB:FMCC) saw their stocks skyrocket following a recent speech about their future. But a look beyond the headlines reveals a surprisingly different reality.

Mel Watt By Ncdotcommunications

Source: Flickr / NCDOTcommunications.

The big news
In a speech in Washington on Tuesday, Mel Watt, the director of the Federal Housing Finance Authority (FHFA), which is responsible for Fannie and Freddie, revealed the plan outlining the future for the two government-sponsored entities (GSEs). In it, he provided an update on the progress of firms located at the heart of the housing market, and also provided guidance into their future.

A glimpse into the headlines revealed a major idea change was in store. Bloomberg noted, "Watt Reverses Efforts to Shrink Fannie Mae, Freddie Mac." The New York Times said, "Overseer Shifts Course on Fannie Mae and Freddie Mac." And the stocks of the two firms were up by nearly 10%.

It would be easy to think Watt had listened to the calls of many who clamored for Fannie and Freddie to be returned into the hands of investors. But Watt's remarks didn't reveal anything of that sort.

Fnma By Future Atlas

Source: Flickr / Future Atlas.

The changes
Watt confirmed that Fannie and Freddie would loosen the standards required to lenders. They would now allow two delinquent payments within the first 36 months after the loans were purchased before the loan was required to be bought back by the banks. He then noted the FHFA will not reduce the size of loans it guarantees, which was previously reported in September of last year.

Watt suggested the decision to no longer lower the loan limits was "motivated by concerns about how such a reduction could adversely impact the health of the current housing finance market." Watt noted the efforts announced today were to ensure the FHFA acts in a way that follows its mandates and strategic plans. He also added, "Congress and the Administration have the important job of deciding on housing finance reform legislation, not FHFA."

The updated goals
In addition to making changes related to its standards and its guarantees, Watt also announced a new outline of the FHFA's strategic plan.

In 2012, acting director of the FHFA, Edward DeMarco, outlined the strategic plan for the operation of Fannie Mae and Freddie Mac, which was to:

  • Build. Build a new infrastructure for the secondary mortgage market.
  • Contract. Gradually contract the Enterprises' dominant presence in the marketplace while simplifying and shrinking their operations.
  • Maintain. Maintain foreclosure prevention activities and credit availability for new and refinanced mortgages.

Yesterday's plan suggested the three goals were now to:

  • MAINTAIN, in a safe and sound manner, foreclosure prevention activities and credit availability for new and refinanced mortgages to foster liquid, efficient, competitive and resilient national housing finance markets.
  • REDUCE taxpayer risk through increasing the role of private capital in the mortgage market.
  • BUILD a new single-family securitization infrastructure for use by the Enterprises, and adaptable for use by other participants in the secondary market in the future.

Of course, the eye-opening swap is the change from "contract" to "reduce," as Watt suggested that the true goal was to lower risk posed to taxpayers, but not reduce their market presence in an effort to allow the FHFA "to meet our mandates of upholding safety and soundness and ensuring broad market liquidity."


In short, the changes were done with an effort to ensure the housing market was stable and secure; but for investors, the key thing remains unchanged.

The thing to remember
It's important to remember, as plainly stated by Fannie Mae itself in its annual report, "during the conservatorship, FHFA, as our conservator, has all powers of the shareholders." And the FHFA is seeking to ensure the housing market doesn't collapse, not that Fannie and Freddie earn money to return to their shareholders.

While changes may have been made to principles and goals that the FHFA will now use to guide Fannie and Freddie, it's critical to see the discussion surrounding their obligations to public shareholders continues to be absent, and the goals of the shareholders and the FHFA remain far apart.

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Patrick Morris has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not 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.

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