The Rise and Fall of Fannie Mae and Freddie Mac
by Henry S. Harrison

Last June, I answered an “Ask Henry” question from a reader: “When will the residential real estate recession end?” My answer was that I thought that it would end in the term of whoever was elected President in November 2016. Between June and when Barack Obama was reelected President, the news media was full of press releases and commentator predictions that the country was well on its way to a real estate recovery.

Real Estate Appraisers — whose livelihood is closely tied to the fate of Fannie Mae and Freddie Mac — as a group seem to be ignoring how the future of these two organizations will affect their businesses. The latest figures show that these two giants are now guaranteeing about 90% of all the single family home mortgages in the US.

On December 29, 2000, the price of Fannie Mae stock hit an all-time high of $86.75 per share. Eleven years later, it hit rock bottom at a low of $0.20 per share. As of September 18, 2013, it closed at $1.17 per share. So the question remains, why is it trading at all, given the government takeover?

The answer is there are a number of people and hedge funds who believe that Fannie Mae and Freddie Mac will survive the present governmental conservatorship and will once again become publicly traded companies. What makes this unlikely, in my opinion, is that the government created a new government senior preferred shares which placed the common stock last in line to receive any assets of the company that remain if and when the conservatorship is terminated. If you are looking for a very long shot investment, Fannie Mae stock should be considered. Your stock broker should be able to tell you how to do this. However, this is not a recommendation.

Most appraisers know that Fannie Mae and Freddie Mac are in trouble. But who they are and what they have done politically to prompt the federal government to announce it is standing by with a possible multibillion-dollar bailout remains unknown to most.

Here is their history.



FHFALogo_notificationFederal Housing Finance Agency

FHFA Sends Congress Strategic Plan for Fannie Mae and Freddie Mac Conservatorships

Federal Housing Finance Agency (FHFA) Acting Director Edward J. DeMarco today sent to Congress a strategic plan for the next phase of the conservatorships of Fannie Mae and Freddie Mac (the Enterprises). The plan builds on the Acting Director’s February 2010 letter to Congress on the conservatorships and sets forth objectives and steps FHFA is taking or will take to meet FHFA’s obligations as conservator. Fannie Mae and Freddie Mac were placed into conservatorships Sept. 6, 2008 and have since received more than $180 billion in taxpayer support.
FHFA identifies three strategic goals for the next phase of the conservatorships:

Build. Build a new infrastructure for the secondary mortgage market;

Contract. Gradually contract the Enterprises’ dominant presence in the marketplace while simplifying and shrinking their operations; and

Maintain. Maintain foreclosure prevention activities and credit availability for new and refinanced mortgages.

“With the conservatorships operating for more than three years and no near-term resolution in sight, it is time to update and extend the goals and directions of the conservatorships,” DeMarco wrote. “FHFA is contemplating next steps to build an infrastructure for the secondary mortgage market that is consistent with existing policy proposals and will support any outcome of the leading legislative proposals. FHFA looks forward to working with Congress and the Administration on a resolution of the conservatorships and a comprehensive review of the nation’s housing finance system,” said DeMarco.

Link to February 2010 letter


FHFA logo
Update on Proposed Overhaul of Fannie and Freddie: Excerpts from a SPEECH by Edward J. DeMarco Acting Director,
FHFA Before the U.S. House of Representatives Subcommittee on Capital Markets, Insurance, and Government-Sponsored Enterprises

Chairman Garrett, Ranking Member Waters and members of the Subcommittee, thank you for inviting me to speak this morning on the Federal Housing Finance Agency’s (FHFA) role as conservator of Fannie Mae and Freddie Mac (the Enterprises) and on proposals regarding the future of the Enterprises...

It is critically important that Congress and the Administration begin the work to define the longterm structure of housing finance. While substantive disagreements about the features of that structure exist, there is near universal agreement that we should not follow the old paradigm. We appreciate the efforts that the Sub-committee has taken to start this process...