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Fannie Mae, Freddie Mac Stocks Tank on Senate Mortgage Reform Bill

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By: Troy Kuhn
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The Federal National Mortgage Association (FNMA) and the Federal Home Loan Mortgage Corporation (FMCC) were the worst-hit publicly traded companies during the mortgage crisis that started to unfold in late 2007. One year into the crisis, both government-sponsored enterprises (GSEs) had lost more than 90% of their share value. Share prices of both companies were trading at less than 30 cents a year ago, but have rallied strongly since then, and both Fannie Mae and Freddie Mac saw their stock price go up more than 20 times. That is, until yesterday, when the Senate’s plan to overhaul the country’s $10 trillion mortgage industry took the wind out of their sails.

Senate leaders in a bipartisan proposal have agreed to overhaul the US mortgage market and eliminate the mortgage giants, Fannie Mae and Freddie Mac. After being delisted from the NYSE on June 16, 2010, both the GSEs are now counting their last days as the Senate moves to dismantle both.

The proposed Senate bill from Democratic Senator Tim Johnson and Republican Mike Crapo has sent waves across Wall Street. But there is little chance that the bill will reach the Senate floor this year, with midterm elections scheduled for November.

The Johnson-Crapo bill is very similar to the proposal from Republican Senator Bob Corker and Democratic Senator Mark Warner, which until now has been the most high-profile housing reform plan. The Senate Banking Committee is expected to vote on the Johnson-Crapo bill in the coming weeks.

Under the proposal, both Fannie Mae and Freddie Mac will be wound down and replaced with a new government reinsurer called the Federal Mortgage Insurance Corp. The new entity, which would be funded by user fees, would issue a federal guarantee for mortgage bonds that would kick in only after private creditors had taken a hit of at least 10%.

Included in the outline is a mandate that strong loan underwriting standards be built into the new system.

It would also require a 5% down payment for all but first-time buyers, although that requirement would be phased-in over time. Some consumer and housing advocates worry that a system with rigid down payments will prevent less affluent Americans from accessing credit.

The Johnson-Crapo plan also includes a proposal to create a member-owned securitization platform and will also establish a mutual co-operative to be jointly owned by small lenders. This mechanism will give community banks access to secondary markets for mortgages.

Fannie Mae and Freddie Mac were bailed out with $188 billion of taxpayer money in 2008. After a sharp rebound in housing prices and a supply crunch in the housing markets, both companies became profitable. The mortgage giants have paid back more than they took in the form of a bail-out. Fannie Mae and Freddie Mac will have paid the US Treasury an astounding $202.9 billion in dividends by the end of March. Against all expectations, Fannie Mae and Freddie Mac became very profitable very quickly.

Many investors are concerned that the two mortgage giants are being eliminated at a time when they have finally become profitable and are paying back taxpayers.

The White House Budget Office said on Monday that Fannie Mae and Freddie Mac would return taxpayers $179.2 billion in profits over the next 10 years. Then why butcher these golden egg-laying geese? Perhaps the US Treasury and the US government have finally understood that their role is to run the country and not act like a hedge fund.

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