Will Politicians Crush Fannie Mae and Freddie Mac?

There are few companies with more political risk than Fannie Mae and Freddie Mac and these developments are key to the future of the housing and financial markets.

May 17, 2014 at 7:00AM


This article is part of a series of articles that looks at Fannie Mae (NASDAQOTCBB:FNMA) and Freddie Mac (NASDAQOTCBB:FMCC) from an investment perspective. To read the full analysis, click here.

It's not often that both sides of Congress agree on something, but in this case, there is a general consensus agreement to wind down Fannie and Freddie.

But we're approaching six years since the bailout and this has not happened because, while democrats and republicans can agree on a desire to wind down Fannie and Freddie, they can't agree on what to replace them with.

As of now, it looks difficult for a housing reform bill to pass based on the layout of each house. Although the Senate has a reasonable chance that with enough negotiating, it could pass a bipartisan bill, such legislation would likely be dead on arrival in the House which is controlled by the republicans taking a firm stance against government involvement in the housing market.

Presidential opinion
Since it would be difficult to pass housing reform legislation in the first place, let alone override a presidential veto, housing reform legislation will need the support of the President to become law. In his last State of the Union address, President Obama mentioned housing reform among the things he would like to see accomplished and previous comments indicate he is favorable to something resembling the Corker-Warner bill.

From Corker-Warner to Johnson-Crapo
Last year, Congress attempted to make its first major attempt at housing reform legislation with the Corker-Warner bill. Under the bill's guidelines, Fannie Mae and Freddie Mac would be wound down and replaced by a Federal Mortgage Insurance Corporation (FMIC) operating on a similar model to the FDIC that protects deposits of up to $250,000 in bank accounts.

Fannie and Freddie's private investors would likely see little if any of the proceeds from the wind-down as the government's $189 billion senior preferred stock stake is ahead of them in line. Fortunately for Fannie and Freddie investors, the Corker-Warner bill never became law.

However, the next housing reform bill is the Johnson-Crapo bill which looks almost exactly like the Corker-Warner bill. Like Corker-Warner, Johnson-Crapo would wind down Fannie and Freddie and distribute proceeds to the government first before giving any leftovers to private investors.

Countdown to elections
After the Senate panel vote was delayed in late April, passage of Johnson-Crapo became even more difficult as Congress in now in a race against the clock. Now, with the vote delayed and six key democrats opposed to the bill's passage is becoming even more difficult.

In just a few months, members of Congress will be leaving to campaign for the 2014 midterms so the bill would need the ultimate financial fast-tracking to move through Congress this year. And with legislation as large and controversial as Johnson-Crapo, the bill is highly unlikely to receive fast-track treatment.

The bottom line
With the exception of some sort of miraculous bipartisan agreement, Johnson-Crapo is highly unlikely to be passed before Congress begins leaving for 2014 campaigning.

Most likely another Congress will take up the issue again but that will again take more time and we may ultimately be left with the same disagreement we have now.

But what's the endgame for Fannie Mae and Freddie Mac investors? If the only thing Congress can agree on is winding down Fannie and Freddie, how can private investors hope to see value in their investments?

The answer may lie in the courts.

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This article is part of a series of articles that looks at Fannie Mae and Freddie Mac from an investment perspective. To read the full analysis, click here.

Alexander MacLennan owns common shares of Fannie Mae and Freddie Mac. This article is not an endorsement to buy or sell any security and does not constitute professional investment advice. Always do your own due diligence before buying or selling any security. 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.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

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David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't 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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