At Fannie Mae and Freddie Mac, Investors Get the Cold Shoulder

FHFA chief Mel Watts eases rules for mortgages, and sees an expanded role for Fannie and Freddie

May 25, 2014 at 1:00PM

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Source: Flickr / rottnapples.

If you thought that mortgage giants Fannie Mae (NASDAQOTCBB:FNMA) and Freddie Mac (NASDAQOTCBB:FMCC) were on their way to oblivion, think again. The new head of the Federal Housing Finance Agency, Mel Watt, has decided that expanding mortgage credit and repaying taxpayers are a priority for the two agencies – and he can't say enough about it.

As for Fannie and Freddie shareholders, Watt recently told an interviewer: "I don't lay awake at night worrying about what's fair to the shareholders."

A step backward for the GSEs?
With Watts at the helm, the two government-sponsored enterprises appear to be experiencing a renaissance of sorts. In recent speeches and interviews, the new FHFA chief been upfront about his new vision for the two GSEs – a view that veers markedly from his predecessor's.

Believing that a key mandate for both agencies is to increase liquidity in the housing finance arena, Watts has softened the rules regarding when lenders will be forced to buyback defective mortgages. This, he hopes, will give some pep to the housing market, but doesn't seem especially conducive to the health of the GSEs.

Stockholders are not a priority
In regards to the "profit sweep" that now directs any profits to the Treasury Department and none to shareholders, Watts notes that he was not involved in that 2012 decision, though he is "comfortable" working within those parameters.

He is adamant that Fannie and Freddie should be primarily concerned with repaying taxpayers, since neither would exist today if not for the crisis-era intervention. As far as the GSEs building up capital is concerned, Watts doesn't feel that this is an issue, because Fannie and Freddie are still in conservatorship.

This attitude is precisely what investors are steamed about, and big stakeholders like Bill Ackman's Pershing Square Capital Management and Bruce Berkowitz' Fairholme Fund have sued to force the government's hand.

Do these fund managers think they will prevail?

Yes, but not in the manner you might expect. Based upon these investors' opinion that a winding-down of the two GSEs will not happen, some analysts think that the plaintiffs believe that the government will eventually have to throw in the towel on that project, and negotiate a settlement with private investors.

Time will tell if they are right, of course. Judging from Watt's attempts to expand the role of both Fannie Mae and Freddie Mac, these investors may be on to something. Additionally, the Johnson-Crapo bill -- the latest attempt to retire the GSEs – scarcely squeaked through the Senate Banking Committee on May 15, with minimal support.

Being correct about the ultimate fate of Fannie and Freddie doesn't mean that stockholders will get a sweet payday, though. The largest shareholders have made it known that they would like to be involved in the makeover of the two agencies, and Fairholme even offered $52 billion last fall to take over and run portions of the GSEs as a private enterprise.

Obviously, the wishes of the largest stockholders most likely do not mirror those of smaller investors, who continue to wait – and hope – for a resolution that doesn't shut them out completely.

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Amanda Alix 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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