1 Thing Every Fannie Mae and Freddie Mac Shareholder Needs to See

Countless investors think the future of Fannie Mae (NASDAQOTCBB: FNMA  ) and Freddie Mac (NASDAQOTCBB: FMCC  ) is bright, but one government official wants you to know just the opposite is the case.

Under Secretary for Domestic Finance Mary Miller.

The powerful remarks
At a recent speech at the National Housing Conference Annual Policy Symposium, Mary Miller, the Treasury Department's under secretary for domestic finance, provided the Treasury's perspective on the two government-sponsored entities, or GSEs.

She highlighted the principles President Obama outlined almost a year ago, which were to "create a new housing finance system that better serves the needs of American taxpayers, borrowers, and renters," and she noted the difficulties that have faced the broader housing market over the past six years.

But her most sobering remarks about Fannie Mae and Freddie Mac came when she said:

Everything we are doing administratively is directed toward ensuring better outcomes for renters and homeowners, but these efforts attack only the symptoms of an unhealthy housing finance system. We need to address the underlying cause, an unsound business model where the majority of housing credit is backstopped by the taxpayer. The fundamental misalignment of incentives at the GSEs, where private gains were made possible through the public's risk of loss, helped exacerbate the crisis.

The troubling truth
Put simply, the U.S. Treasury Department, which has received $126.8 billion in dividends from Fannie Mae and another $86.3 billion from Freddie Mac, seemingly doesn't care about the businesses of Fannie and Freddie -- and their respective shareholders -- but instead, the broader outcome for the housing market.

Source: Flickr / Future Atlas.

As you can see, Miller even blames the massive losses and troubles Fannie Mae and Freddie Mac experienced during the financial crisis on the fact there was a misalignment of those who could reap the rewards -- shareholders -- versus those who faced the responsibility of possible losses: taxpayers.

Many, including billionaire Bruce Berkowitz, have called for Fannie and Freddie to be returned or reformed to allow shareholders to see the benefits of the business model that drives Fannie and Freddie.

Yet Miller instead argues that this is a fundamentally flawed system, and the purposes of Fannie and Freddie are not to benefit shareholders, but instead the broader American public through the housing market.

She went on to say:

Even if truly rehabilitating the GSEs were possible, recapitalizing them adequately would take at least 20 years. During these 20 years, the taxpayer would remain at risk of having to bail out the GSEs during another downturn. We would also be signing up for another 20 years of underserving responsible credit-worthy Americans seeking to buy a home.

Again, her focus was entirely on the risk American taxpayers face, and the purpose of Fannie and Freddie to assist in providing an ability for those who are able to purchase a home. If Fannie and Freddie are recapitalized and returned to private shareholders, there is huge upside for the shares. But if that takes 20 years, the actual gains (considering opportunity costs) will be much smaller.

The key takeaway
Of the 2,750 words Miller prepared in her speech, "shareholder" was never mentioned, but "taxpayer" was uttered eight times. Although she said that "there is no quick fix solution around this," we must see that the government group that runs Fannie and Freddie seemingly has no consideration for those who own the shares, which is a dangerous position to sit in.

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Read/Post Comments (6) | Recommend This Article (5)

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 June 24, 2014, at 9:18 AM, smauney wrote:

    Mary Miller - Being a good bureaucratic trooper as she was walking out the door to work for big banks. What investors care about is Judge Sweeney making Treasury bring disclosure documents to light "in waves". Judge Sweeney says the Treasury is "Schizophrenic" while trying to hide behind the shield while using a sword on the GSE's.

  • Report this Comment On June 24, 2014, at 9:50 AM, lkjhg wrote:

    Motley Fool, this is flat out embarrassing. Not only is this old news, but Mary Miller resigned the day after she made these comments. She is NOT, repeat NOT, the Treasury Department's under secretary for domestic finance. Her resignation is old news.

  • Report this Comment On June 24, 2014, at 11:03 AM, bigjohn327 wrote:

    this article is clueless as the fnf attempt to cover up the governments misdeeds has crashed and is not going to happen,,,,legislation is dead. why bring it up. this is not based on any facts and does not even discuss anything current

  • Report this Comment On June 24, 2014, at 11:44 AM, TMFMorris wrote:

    The news of her leaving the Treasury was actually circulated the day before these remarks were made.

    She did not step down, but announced she would be leaving the Treasury beginning in September following four years of service. Coverage from the WSJ is available here:

    As you can see, that article was run on the 12th, and her speech cited in the article was made on the 13th. She still retains her position and still is the Under Secretary for Domestic Finance (

  • Report this Comment On June 24, 2014, at 5:32 PM, Wells wrote:

    These are deceiving saying. If only took 10% dividend and not swept all profit, the two GSEs would remain about $140 billion as reserve for bad debt. The Federal Reserve's risk resistance tests for the two GSEs only need $190 billion. In one or two years the two GSEs are able to reach to $190 billion or more and afford itself the risk taxpayer faced in 2008. If recapitalized and returned to private shareholders right away, the Treasury will get much more than winding up, also more than the $188 billion bailout. Which one is better for taxpayer and physically protects taxpayer from risk? It is very clear!!! Those gov't bureaucrats always talk and repeat these false and bad things to trick and intimidate people, investor and market. They are merely politicians and overuse the power taken from public. The two GSEs can be turn to commercial financial companies without government guarantee, but all the business activities are commercial and marketized. Mortgage rate will go up without doubt. If any political party and politician want more voters and supporters for them, they can proclaim lower mortgage rate and offer government guarantee to the two new recapitalized companies or some other companies. They can also set up new specialized organizations to do it. Then there would not be so much mess for mortgage finance market.

  • Report this Comment On June 25, 2014, at 1:14 AM, kthor wrote:

    Fannie Mae and Freddie Mac future is called Bank of Obama!

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Patrick Morris

After a few stints in banking and corporate finance, Patrick joined the Motley Fool as a writer covering the financial sector. He's scaled back his everyday writing a bit, but he's always happy to opine on the latest headline news surrounding Berkshire Hathaway, Warren Buffett and all things personal finance.

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