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

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.

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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.

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