1 Billionaire Weighs in Again on Fannie Mae and Freddie Mac

Warren Buffett at Berkshire Hathaway has once again provided a unique and critical insight into what he believes is best for government-sponsored mortgage enterprises Fannie Mae  (NASDAQOTCBB: FNMA  )  and Freddie Mac  (NASDAQOTCBB: FMCC  ) . 

At the latest Berkshire Hathaway annual meeting, Buffett and longtime business partner Charlie Munger continued their tradition of conducting a question and answer session lasting more than six hours. While the two weighed in on countless issues, one of the most fascinating (and longest) discussions resulted from this question:

Do you think we need housing reform? How do you think we should do it, and should Berkshire be involved?

Although Fannie and Freddie weren't going to show up among Berkshire's investments, this question came less than one month after many -- including myself -- speculated whether the holding company would seek to be involved in the mortgage insurance industry through its massive insurance arm.

Buffett took a fascinating stance on the subject, and began by noting:

I think the 30-year fixed-rate mortgage is a terrific boon for homeowners, but it's not a great instrument to own as an investor. It's done a lot for homeownership in the country. Let people get into homes earlier, kept costs down -- the government guarantee keeps the cost down.

As my Fool colleague David Hanson noted, Munger was even blunter, suggesting the Fannie and Freddie "experiment was a total failure."

Munger added:

When private industry was running it, they owned the whole field and you had the biggest bunch of thieves and idiots running things, so I'm not all that trusting of private industry in this field. At the moment, Fannie and Freddie are being pretty conservative, and they're making pretty much all the home loans. I think that's OK.

In all of this we can see one key takeaway in the stance of Buffett and Munger surrounding Fannie and Freddie.

Source: Flickr / Future Atlas.

The critical insight
Buffett and Munger noted that one reason Fannie and Freddie collapsed was the reality that they were private enterprises seeking to deliver profits, and as Buffett said, "to serve their masters and deliver double-digit earnings gains."

Buffett and Munger seemed to suggest that instead of serving shareholders by delivering returns, the two entities are best suited to ensure housing in the United States remains affordable to millions.

After all, Credit Sesame has pointed out how inexpensive housing in major U.S. cities was relative to other cities across the globe:


Source: Credit Sesame.

As Buffett suggested, part of the reason behind this is "the government guarantee keeps the cost down."

The broader question
Questions still remain about the future of Fannie and Freddie -- Buffett himself said "the question is how to keep the government in the picture without keeping politics in the picture" -- yet Buffett and Munger are apparently comfortable with the government controlling the mortgage industry through Fannie and Freddie.

They believe the benefits and returns the two entities provide shouldn't extend simply to thousands of shareholders, but instead to millions of Americans. Do you agree?

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Read/Post Comments (6) | Recommend This Article (4)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On May 23, 2014, at 8:54 AM, 1AnthonyLabelle wrote:

    I would like to hear more from Warren and Charlie on the issue , regarding the dangers of nationilization. The millions spent on the common securitization platform without proper cost benefit analysis and the changing changing tide the left or right can bring are two examples.

  • Report this Comment On May 23, 2014, at 9:05 AM, infinitemf wrote:

    Is it ok to nationalize the private companies unlawfully however noble the motives are?

    We are a free market capitalistic economy where Gov does not compete with private sector.

    How Munger/Buffet fit in their ideas with existing US economy/policy.

    Is it not easy talk recklessly than provide meaningful advise?

  • Report this Comment On May 23, 2014, at 9:30 AM, bigjohn327 wrote:

    unfortunately buffett has become a fan of far left politics and his railroad is transporting the oil that the keystone pipeline would be transporting if built. He thinks its ok to totally nationalize the mortgage industry and steal the property of the shareholders and redistribute it to the people. How about a billionaires tax mr buffett for every billion you are worth they government takes 100 million every year?

  • Report this Comment On May 23, 2014, at 9:58 AM, Tolliejean1949 wrote:

    These loans were tied up or bundled into investments for 20 years and in our parents retirement accounts. Can Buffett tell the future of these investments and if they are protected? They seem to think it is only about the share holders and stock investments. There are many avenue of investments that were created for these two companies among other companies on the market today for funding. The government should undo the sweep they created as government has received the funds back for the bail-out amount. Bottom line Michelle would really be upset if Obama took away her bank account for a year and did not let her and the girls spend and shop at will. The same for Buffett's wife as she would be upset if she could not spend for a year and all her money taken away. Not nice, guys and government.

  • Report this Comment On May 23, 2014, at 11:14 AM, ronandmelissa wrote:

    we have been a mixed economy for a long, long time. People who keep saying we are not a true capitalistic run economy,society here. Please wake up.

  • Report this Comment On May 23, 2014, at 11:15 AM, ronandmelissa wrote:

    * people who keep saying we are a true capitalistic run economy/society please wake up. we are not one.

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