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Fannie Mae And Freddie Mac Congress Has A Motive

Jul. 04, 2013 10:40 AM ETFNMA, FMCC, GM, AIG2 Comments
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Recently there has been a lot of press around the bipartisan bill Senators Bob Corker, a Tennessee Republican, and Mark Warner, a Virginia Democrat have been drafting. The overall plan in short form is to unwind Fannie Mae and Freddie Mac over a period of 5 years. This would then hold the U.S. treasury liable for all existing mortgage guarantees. Currently Fannie Mae OTCQB:FNMA and Freddie Mac OTCQB:FMCC are reporting record profits. Together they hold roughly 80% of the mortgage market which equates to over 5 trillion dollars. Since the massive government bailout in 2008 which totaled $189.4 billion dollars. Fannie Mae and Freddie Mac have paid back $131.6 billion and are on track to pay back the full amount of $189.4 billion by the end of the year. Another important thing to note is that Fannie and Freddie have recorded record profits this year. The timing of this bill is no coincidence, why now. Fannie Mae has existed as a viable and solvent entity for 70 years until 2008. During the financial crisis of 2008 General Motors GM and American International Group AIG both experienced financial downfall of similar proportions. Both of the entities also having over 70 years history of long standing solvency, however Senator Corker is not drafting bills to wind them down. Why are bills of this nature being drafted, that is the real question we have to ask ourselves, who is the beneficiary?

The Motive

In the government bailout plan for Fannie and Freddie the government is able to retain all profits of both corporations indefinitely. This includes all profits even after the $189.4 billion is paid back, meaning no profits are ever returned to any shareholders. Fannie and Freddie so far this year have paid back $59.4 billion with more to come. With the housing market on the rebound, home prices sky rocketing, these dividend payments will continue to flow in to the treasury and will increase over the next 5 years. Specifically to quote a statement from Timothy Mayopoulos CEO of Fannie Mae in an inclusive interview with Bloomberg he said "we expect remain profitable for the foreseeable future". Do the math on what Congress stands to gain over the next 5 years of dividend payments, it exceeds $100 billion. Congress in the past has been known to fall short on meeting deadlines. My suspicion is that the Fannie and Freddie wind down will be no different. In this particular case it will pay not to meet the deadline.

The other rare occurrence that further proves out this motive is the bipartisan effort. While Democrats and Republicans do not fully agree on how to wind down these two entities, they do agree on the dissolution of Fannie and Freddy. Again the important question is why? Who is the beneficiary? The answer is again simple the government. With both parties looking to cut the U.S. deficit, what better way than to keep the single largest private contributor Fannie and Freddie "alive" and under their control.

Disclosure: I am long OTCQB:FNMA, OTCQB:FMCC.

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