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The Fannie and Freddie Experiment Was a "Total Failure"

fool.com | May 5, 2014

By Amy Payne

Despite recent reports suggesting Warren Buffett was open to filling a potential void in the housing finance market if Fannie Mae and Freddie Mac were wound down, Buffett and Charlie Munger all but squashed that notion during the Berkshire Hathaway annual shareholder meeting on Saturday.

During the famous day-long Q&A session with Berkshire shareholders, a questioner asked if Buffett thought Berkshire could play a large role in a more privatized housing finance market because of Berkshire's underwriting expertise and experience in the housing market.

Buffett said it was very unlikely that Berkshire would become a big player in that market.

So what does Buffett think should happen to the market?

Buffett highlighted the U.S. housing market's enormous size ($11 trillion) as a massive challenge to privatizing the market simply because there isn't enough capacity in the private insurance market.

He seemed to believe a system similar to the plan proposed by Sens. Johnson and Crapo, as well as Sens. Corker and Warner, could potentially work. Noting that the 30-year fixed rate mortgage is a great thing for the average American, Buffett said the government ultimately needs to be the insurance entity to keep rates low.

His partner, Charlie Munger, took a more blunt stance.

Munger believes the current system is best option: Continue to conservatively run Fannie Mae and Freddie Mac and do not return the entities to the hands of private shareholders. Despite addressing the common concerns with the current model, Munger expressed even more doubt that private mortgage finance players would operate a better system.

One of the largest drivers of the collapse of Fannie Mae and Freddie Mac was the pressure to deliver continued earning-per-share growth for the private shareholders. Both companies aimed to achieve this growth by taking out cheap debt and building massive securities portfolios.

These legacy portfolios are currently being wound down -- a move Buffett and Munger agreed was the right one. They said the two GSEs were essentially operating as the country's largest hedge funds before the housing crisis.

As current common and preferred shareholders continue to hang in a state of financial-limbo, the path to significant profits (outside of potential legal settlements) continues to look like one littered with road-blocks. Any passable law making its way around Congress ignores these shareholders and now two of the best business minds in the world in Buffett and Munger agree that returning these entities to private hands would be a mistake.

Munger wrapped up the discussion by saying that the old Fannie Mae and Freddie Mac "experiment was a total failure."

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CFLA was founded by the Nation's Leading Foreclosure Defense Attorneys back in 2007 to serve the Foreclosure Defense Industry and fight pervasive Bank Fraud. Since opening our virtual doors, CFLA has rapidly expanded to become the premier online legal destination for small businesses and consumers. But as the company continues to grow, we're careful to hold true to our original vision. For us, putting the law within reach of millions of people is more than just a novel idea—it's the founding principle, just ask Andrew P. Lehman, J.D.. With convenient locations in Houston and Los Angeles, you can contact Our National Account Specialist and General Manager / Member Damion W. Emholtz at 888-758-2352 for a free Mortgage Fraud Analysis or to obtain samples of work product, including cutting edge Bloomberg Securitization Audits, Litigation Support, Quiet Title Packages, and for more information about our Nationally Accredited and U.S. Department of Education Approved "Mortgage Securitization Analyst Training Certification" Classes (3 days) 24 hours for approved CLE & MCLE Credit (Now Available Online).

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