Fannie, Freddie investors may find all is not yet lost

By Andre Shashaty

The mortgage market-makers Fannie Mae and Freddie Mac were in the news again Jan. 8, when President Obama talked about his efforts to boost the housing market by helping more people buy homes. The only news value in the announcement was a cut in premiums for FHA mortgage insurance. But a careful reading between the lines suggests that those of us owning stock in Fannie Mae and Freddie Mac may soon see an end to the federal conservatorship of the two companies.

The White House announcement to accompany the president’s speech DOES say he still  wants to see “the end of the duopoly” Fannie and Freddie have held on the home mortgage business.  But this language is buried way down in the document and, taken in context of the new political outlook in Washington, it suggests a distinct lack of emphasis on the goal of dismantling Fannie and Freddie as they exist today.

When you look at all the recent developments regarding Fannie and Freddie, it seems more likely than not that the conservatorship will end, possibly in 2015, and that stock holders will once again be able to share in the profits of these companies, instead of seeing every dollar of profit go to the U.S. Treasury, as is currently the case.

The most obvious and important evidence supporting this outlook is that Congress and the White House have screwed around with “housing finance reform” for seven years now.  They have NOTHING to show for it, since the only serious legislative effort petered out in the Senate many months ago.  Even politicians sometimes break down and smell the coffee:  Agreement cannot be reached on a new structure for federal support for a secondary mortgage market.  And if enough people understand that, the only alternative is to let Fannie and Freddie live on in their current form, albeit probably with much tighter oversight.

Finally, my guess (and it IS only a guess) is that Mel Watt, the man who oversees Fannie and Freddie for our government, will act before Obama’s term ends to liberate the two firms from federal control.  He tipped his hand on that, I believe, when he instructed the two companies to start funding the National Housing Trust Fund.  I doubt he’d have done that if he expected the companies to disappear anytime soon.

Finally, there is the clear lack of legal justification for taking profits and possibly ownership away from shareholders.  One never knows what a judge will decide on the cases asking that Treasury give shareholders back their rights.  But I think courts DO reflect the economic and political reality of the times in cases like these, and I am optimistic shareholder rights will be eventually upheld.  I also think that Watt and the Dept. of the Treasury may well decide they would rather act on their own than face a prospect of a court order.

In short, the hatred for Fannie and Freddie what burned so hot for the years since the mortgage meltdown may finally have run its course.



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