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More Reason for Fannie Mae and Freddie Mac Shareholders to Be Afraid

fool.com | February 16, 2014

By Patrick Morris

Fannie Mae (NASDAQOTCBB: FNMA ) and Freddie Mac (NASDAQOTCBB: FMCC ) have seen their stock prices rise by almost 950% over the last year -- but recent congressional action reveals the future may not be so bright.

More potential overhaul

Press wires have been abuzz lately about the possible action from the Senate Banking Committee to introduce a bill in the coming weeks that would bring overhaul to the mortgage financing industry and overhaul the current system entirely.

The chairman and ranking members of the committee, Tim Johnson (D-SD) and Mike Crapo (R-ID), respectively, issued a rare joint statement last week that noted; "With the hearing and information-gathering stage behind us, our hard work continues as we dive deep into the drafting and negotiating phase of Housing Finance Reform. Our goal from the start has been to produce the strongest bipartisan bill possible -- a bill that will strengthen the housing finance system while ensuring a level playing field for all lenders and access to credit for all creditworthy homebuyers, no matter where they live."

There was no guidance on what the bill will entail, but many have speculated it will draw on the Corker-Warner bill, which has called for the winding down of Fannie Mae and Freddie Mac within the next five years and would ultimately provide the common shareholders of the two government sponsored entities with little to nothing in return.

The statement from Johnson and Crapo noted this was the "top priority," for the committee and affirmed it was also a priority for President Obama, who called for "legislation that protects taxpayers from footing the bill for a housing crisis ever again, and keeps the dream of homeownership alive for future generations," in his State of the Union address.

Why it matters

Fannie and Freddie shareholders need to be concerned because this would be the second major bill from the Senate proposing significant change to the underlying structure of the housing market, with the role of the two GSEs being a central focus.

Already, Fannie Mae and Freddie Mac operate with a total disregard for common shareholders by returning all profits to the U.S. Treasury, the two paid back dividends totaling $39 billion in December alone. Fannie Mae also said simply in its annual report, "we are no longer managed with a strategy to maximize shareholder returns," and "every dollar of earnings that Fannie Mae and Freddie Mac generate will be used to benefit taxpayers for their investment in those firms."

With two Congressional bills that cross party lines, the support of the United States president, the director of the body that controls Fannie and Freddie, and even the companies themselves all aligned to ensure the companies don't operate in the interest of shareholders, but instead of U.S. taxpayers, with total overhaul as the ultimate aim, common shareholders of Fannie and Freddie have every reason to be concerned the days of wild speculation and surging stock prices are over.

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