Government Projects Profit From Fannie Mae, Freddie Mac To Top $179B

Fannie Mae Common Securitization Platform Fannie Mae Mortgage Insurance

Fannie Mae

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The US government is becoming increasingly bullish on their ownership of Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC), the now highly profitable mortgage finance companies.

Revenue from Fannie, Freddie triple that of 2012 government estimate

The White House budget office said Monday that it anticipates the government could take in nearly $179 million in profits over the next ten years if the terms of their conservatorship remain intact, tripling the government estimated profit from just one year ago.

In the wake of the 2008 mortgage-backed securities failure that preceded the stock market sell-off, the US government provided Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) $187.5 billion in bailout funds to keep the firms in business.  After current payments are made at the end of this month, Fannie and Freddie will have repaid $202.9 billion to the government.

Amended agreement subject of lawsuits

In 2012 the government amended the bailout agreement, saying that all profits would flow to the US Treasury, with nothing going to shareholders as opposed to a 10% dividend on the bailout funds only. Buoyed by a strong housing market, the mortgage finance giants were much more profitable than anticipated, leading remaining shareholders to hope that the dividend stream would return.

Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) were thought of as highly conservative investments and held in the portfolios of many mom and pop retail investors as well as pension and retirement funds.  When the crisis hit and the government took control, many confused retail investors sold their shares to hedge funds such as Perry Capital and Fairholme Capital Management, who are now aggressively lobbying the government to return the company into shareholder hands.

Activist Ralph Nader’s voice is heard

As previously noted in ValueWalk, Ralph Nader, a shareholder, is taking an activist stance as well. At a recent roundtable on the topic:

“In all the discussions following the 2008 Wall Street collapsed that involved Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC), there was very little attention paid to the owners, the shareholders,” Nader said in prepared remarks. “These shareholders were assured in 2008 by the regulator (Lockhart) and then Chairman Bernanke and Secretary Paulson that both Fannie and Freddie were adequately capitalized and there was ‘nothing to worry about.’  Then a few weeks later they collapsed… What was interesting about those assurances (from Lockhart, Bernanke and Paulson) is that they were conducted by government officials.  If corporate officials ever made those kinds of deceptive comments, even the Securities and Exchange Commission would have woken up and we would have seen some enforcement clarity.  But it didn’t happen.”

Shareholders maintain that the decision by the Treasury to claim Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) profits as dividend payments is “plainly unlawful,” according to Theodore Olson, a lawyer at Gibson, Dunn & Crutcher LLP representing a shareholder, hedge fund Perry Capital. Olson, a former U.S. solicitor general who represents them, who spoke at the event, said “This deal has proven extraordinarily lucrative for the federal government.”

Shareholders “zombies?”

When characterizing the jilted shareholders, Nader described the group by saying “We are not talking about day traders.  We are talking about investors who had been told Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) were the safest investments next to treasuries.” The government is now treating shareholders “as if they were zombies,” he said.

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About the Author

Mark Melin
Mark Melin is an alternative investment practitioner whose specialty is recognizing a trading program’s strategy and mapping it to a market environment and performance driver. He provides analysis of managed futures investment performance and commentary regarding related managed futures market environment. A portfolio and industry consultant, he was an adjunct instructor in managed futures at Northwestern University / Chicago and has written or edited three books, including High Performance Managed Futures (Wiley 2010) and The Chicago Board of Trade’s Handbook of Futures and Options (McGraw-Hill 2008). Mark was director of the managed futures division at Alaron Trading until they were acquired by Peregrine Financial Group in 2009, where he was a registered associated person (National Futures Association NFA ID#: 0348336). Mark has also worked as a Commodity Trading Advisor himself, trading a short volatility options portfolio across the yield curve, and was an independent consultant to various broker dealers and futures exchanges, including OneChicago, the single stock futures exchange, and the Chicago Board of Trade. He is also Editor, Opalesque Futures Intelligence and Editor, Opalesque Futures Strategies. - Contact: Mmelin(at)valuewalk.com