Fannie, Freddie Financials Shouldn't Look Like This

Includes: FMCC, FNMA
by: Benjamin Goldman

Fannie Mae (OTCQB:FNMA) and Freddie Mac (OTCQB:FMCC) have been in the news recently for paying Newt Gingrich between $1.6 million and $1.8 million in consulting fees and paying top executives millions of dollars in bonuses. Although these two stories are good reads and a good conversation starter with business saavy friends and co-workers, they do not even begin to address the reasons why tax payers will probably have to pay over $200 billion to bail out these two companies in government conservatorship. Consulting fees tend to get very expensive over time, and whether Freddie Mac paid the fees for genuine consulting services or just to gain Republican support is more of the debate. However, there are much larger issues at stake.

Freddie Mac has over $2.2 trillion of assets on its books while Fannie Mae has over $3.2 trillion. The secondary mortgage market has been almost completely abandonded since the Financial Crisis and figuring out how the secondary mortgage market should work in the future is a giant issue. When these companies' executives tried to justify their bonuses, one of their main arguments was that these bonuses are typical in the industry. That's a pretty tough argument since in a free market economy, Fannie and Freddie would no longer exist. Fannie alone lost $7.6 billion in the last quarter. They have approximately a $200 billion loss combined under retained earnings on their balance sheets. Since 2008, the two companies have reported losses of over $260 billion. If Freddie took Newt Gingrich's advice on how their business model was "insane" and that there was a mortgage bubble, those $1.7 million would have gotten a very nice return on investment.

People need to start looking at the big issues on the mortgage crisis. Yes, Fannie Mae and Freddie Mac's frivilous spending definitely put them on the wrong track, but the debate over whether the secondary mortgage market should be publicly controlled should prevail as a much bigger issue in the 2012 election. Both Democrats and Republicans have always pushed for increased home ownership in the United States, but the financial statements of Fannie and Freddie should never have to be as bad as they currently look.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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