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Fannie Mae and Freddie Mac Just Made Another $1.5 Billion -- But Shareholders Won’t See a Dime

By Matthew Frankel, CFP® - Feb 28, 2015 at 4:17PM

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The once left-for-dead agencies continue to rake in the profits. So, why aren't investors seeing any returns?

Source: Futureatlas.com

Fannie Mae (FNMA 1.00%) and Freddie Mac (FMCC 0.95%) recently reported their 12th consecutive quarterly profit, but thanks to the conditions of their 2008 bailouts none of this money will make its way into shareholders' pockets.

Promising results from both agencies
For the fourth quarter, Fannie Mae and Freddie Mac reported earnings of $1.3 billion and $227 million, respectively. For the year, the agencies produced a combined net income of $21.9 billion.

As part of the bailout arrangement, however, all of Fannie and Freddie's profits go directly to the U.S. Treasury. Combined, the agencies received nearly $188 billion from the U.S. Treasury, so it makes sense that the government wants to be paid back, right?

The only thing is that the government has been paid back -- sort of. As of March, Fannie and Freddie will have sent more than $228 billion to the Treasury, or about $40 billion more than the original cost of the bailout. But here's the thing: the payments to the Treasury are considered "dividends" and have no effect on the outstanding balance of the bailout funds.

As you might imagine, shareholders aren't thrilled about this, with hedge-fund managers Bill Ackman and Bruce Berkowitz even suing the government to try to change the terms of the deal.

Will shareholders ever get paid?
It's hard to make a case that the shareholders shouldn't get paid here. After all, many of them bought shares several years ago when Fannie and Freddie were hemorrhaging money and were left for dead by most experts. Now that the agencies have turned things around, shouldn't they reap some rewards?

Ackman, who is Fannie and Freddie's largest common shareholder, made the case that by returning the companies to the shareholders and allowing them to build up their capital levels, it could be a win-win for shareholders as well as the government. In a recent presentation, Ackman made the case that shares could be worth from $23 to $47 (about eight to 17 times their current value), and that the government -- which holds warrants for about 80% of Fannie and Freddie -- could see $600 billion in returns over time, much more than they can expect by simply diverting the profits.

Finally, one thing that concerns shareholders and government officials alike is the potential need for further bailouts if the current arrangement continues. Not only are all profits diverted to the Treasury, but Fannie and Freddie are required to reduce their capital reserves by $600 million per year. Each company currently has reserves of $1.8 billion, which will be completely depleted by 2018.

Should you invest?
I'd definitely agree with the assertion that Fannie and Freddie (as well as the shareholders) would be better off if they were allowed to operate like any other publicly held company. And it appears that public and professional opinions may be shifting in favor of the shareholders, especially after the potential for another bailout was mentioned.

However, this is still a gamble, and a lot of things need to go right before shareholders would ever see a dime. Furthermore, bear in mind that many "big time" investors -- namely, Ackman and Berkowitz -- still have small positions in Fannie and Freddie relative to their other investments and can afford to take the risk.

My instinct tells me that ordinary investors should stay away, as I'm not one to take on such high-risk investments. Those investors who can stomach the risk and ensuing legal and political drama may indeed be rewarded, but as a glance at the agencies' share price tells us, it still isn't very likely.

Matthew Frankel has no position in any stocks mentioned since he doesn't like risky investments, but does have a mortgage guaranteed by Fannie Mae. 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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Stocks Mentioned

Federal National Mortgage Association Stock Quote
Federal National Mortgage Association
FNMA
$0.66 (1.00%) $0.01
Federal Home Loan Mortgage Corporation Stock Quote
Federal Home Loan Mortgage Corporation
FMCC
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