Could This Democrat's Support Lead to Fannie Mae And Freddie Mac Going Away?

Several lawmakers have been pushing to wind down Fannie and Freddie for some time now, but have run into Democrat resistance.

Jun 26, 2014 at 9:33AM

There has been talk of winding down Fannie Mae (NASDAQOTCBB:FNMA) and Freddie Mac (NASDAQOTCBB:FMCC) for some time now, which would put shareholders at great risk of being wiped out entirely. A bill to do just that passed the Senate Banking Committee earlier this year, but opposition from Democrats provided some comfort for the agencies' shareholders. However, a new development could get the other side of the political spectrum on board.

Fannie Mae

www.futureatlas.com

New support
Julian Castro, President Obama's nominee to head the Department of Housing and Urban Development (HUD), urged Congress to continue its efforts to shut down Fannie and Freddie.

He said the current housing finance system is not serving Americans well, and that there are much better alternatives that should be explored.

This could go a long way toward increasing Democrats' support of a bill to wind down the two agencies. And, in its current form, the Senate bill calls for the sale of both companies' assets and ensures the Treasury (and American taxpayers) maximizes its return on the bailout investment before Fannie and Freddie's shareholders, and even the preferred shareholders, see a dime for their investment.

Shareholder efforts
Not surprisingly, shareholders are not too happy about the prospect of being wiped out, nor are they satisfied with the current arrangement, under which the U.S. Treasury is entitled to 100% of the profits earned by Fannie and Freddie.

They make some very valid arguments. If the government didn't want shareholders to profit, why were the shares allowed to continue to trade?

And, as of the latest data, Fannie Mae has paid the government back almost $127 billion on their $116 billion bailout and Freddie Mac has paid $86.3 billion, about $15 billion more than it borrowed. So, now that the Treasury has been paid in full and then some, shouldn't investors start seeing some profit?

So, a group of shareholders lead by hedge fund giants such as Bill Ackman and Bruce Berkowitz have filed suit against the U.S. government to try to change the arrangement. Even well-known activist investor Carl Icahn is getting into the mix, having purchased 6.8 million shares of Fannie Mae and 5.7 million of Freddie Mac from Berkowitz's Fairholme Funds.

Tread carefully
One thing is for certain – the U.S. Government cares more (as it should) about creating a healthy housing market than it does about shareholders making money.

Because of this, the shareholders are at the mercy of the courts. Senator Mike Crapo, who co-authored the Banking Committee's bill has said the structure of Fannie and Freddie's conservatorship is a matter for the courts, and Congress should not dictate the outcome.

While it's tough to make the case that shareholders shouldn't get some return now that Fannie and Freddie are profitable, I'm not sure if I have enough faith in the lawsuits' outcome to throw my money into the agencies.

And, if I had been holding for a while, with shares up tenfold over the past couple of years, I'd have to think about taking my profits and getting out, whether it is morally right or wrong. Or, at least think about taking some money off the table to lock in some profits.

FNMA Chart

Either way, if you're invested in Fannie and Freddie, you need to pay very close attention to the news and make decisions accordingly. Just know that at this point, owning shares in either company is much more of a gamble than an investment.

Better stocks to buy than Fannie and Freddie
The smartest investors know that dividend stocks simply crush their non-dividend paying counterparts over the long term. That's beyond dispute. They also know that a well-constructed dividend portfolio creates wealth steadily, while still allowing you to sleep like a baby. Knowing how valuable such a portfolio might be, our top analysts put together a report on a group of high-yielding stocks that should be in any income investor's portfolio. To see our free report on these stocks, just click here now.

Matthew Frankel 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.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers