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Fannie Mae And Freddie Mac Becoming Huge Cash Cows

valuewalk.com | January 5, 2014

By Clayton Browne

The worm has clearly turned for Fannie Mae / Federal National Mortgage Association (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC). Just five years ago both financial institutions were on the verge of bankruptcy and required a combined $187.5 billion dollar government bailout to keep them afloat. That has completely changed today, as both Fannie Mae and Freddie Mac are financially healthy and have become a source of substantial income for the government.

 

$40 to $50 billion in profits annually to the government

According to Guy Cecala, publisher of Inside Mortgage Finance Publications, Fannie Mae / Federal National Mortgage Association (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) have become profit-producing cash cows for the government. “We’re a country that’s running huge deficits, and here are two government entities that are going to produce somewhere in the neighborhood of $40 billion to $50 billion a year for the government.”

A January 2nd article in the Los Angeles Times also mentions that Fannie Mae / Federal National Mortgage Association (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) sent the U.S. Treasury a combined $39 billion this week just for their latest quarterly payment.


Private buyout offers

The improving circumstances of Fannie Mae / Federal National Mortgage Association (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) has attracted the attention of private investors. Fairholme Capital Management, which already owns $3.5 billion in preferred stock in the two companies, offered to acquire the mortgage-insurance businesses of Fannie Mae and Freddie Mac in a recapitalization plan in November.

However, the Obama administration said they were not interested in a privatization plan and plan to shut down Fannie Mae / Federal National Mortgage Association (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) and replace them with a scaled-down government system of mortgage guarantees.

Both houses of Congress are also working on bills to put Fannie Mae / Federal National Mortgage Association (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) out of business, although the bills take antithetical approaches to replacing them.
Opposition to closing Fannie Mae and Freddie

The vast majority of residential real estate professionals think closing down Fannie Mae / Federal National Mortgage Association (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) is a bad idea, and is likely to negatively impact the real estate market. Several other well-known figures in the real estate industry besides Mr. Cecala have recently commented on the possible shut down of Fannie Mae / Federal National Mortgage Association (OTCBB:FNMA) and Freddie.

“The government doesn’t feel any rush to shut down” Fannie Mae / Federal National Mortgage Association (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC), said Stuart Gabriel, director of UCLA’s Ziman Center for Real Estate. “They are profitable today, and they do provide the vital function of providing liquidity to the marketplace.”

Almost 62% of the new mortgages that closed in the third quarter of 2013 were financed or funded by Fannie Mae / Federal National Mortgage Association (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC).

 

Back to January 2014 Archive

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