Fannie Mae and Freddie Mac are facing possible changes due to attempts to congressional efforts to restructure the companies, despite recent improvements to their net incomes. The two largest Government Sponsored Enterprises (GSE) plummeted in 2008, when the financial crisis hit. During the first quarter of 2013, they were trading at less than 30 cents a share. Over the past 12 months, however, the GSEs have been soaring, with Fannie Mae closing today at $4.26 and Freddie Mac ending the day at $4.24 per share.
According to Bill Ackman, founder and general partner at Pershing Square Capital Management, the sister companies could improve to at least $23 a share and perhaps as much as $47 as the housing recovery gains strength over the next few years. The $15 billion hedge fund is the largest private investor in the two companies, holding an 11 percent stake in each of the two secondary market lenders. The federal government has 79.9 percent stakes in each of the companies.
The Senate Banking Committee voted to approve a bill restructuring the two companies earlier today in an effort to get the government out of the mortgage business, Ackman sees Fannie and Freddie as the “bedrock of the housing system.” He believes that Fannie and Freddie are essential to guaranteeing the middle class access to affordable mortgages for credit worthy borrowers.
The inflation of real estate values was a nationwide phenomenon, with home values going up year after yearn until 2007, when the housing bubble started to deflate. From 2003 to 2o07 , housing values escalated by as much as 98 percent in some markets. From 2007 to 2009, the real estate market gave back all of that value and, in some places lost as much as 25 percent off their 2003 values. There was a 46 percent drop in real estate values in six major markets, including San Diego, Miami, Phoenix, Los Angeles, Las Vegas and Tampa, cities that have now seen an average improvement of 26 percent from 2009 to 2014. These improvements are being booked despite stricter mortgage lending guidelines that have frozen many potential home buyers out of the residential mortgage market. Higher credit scores, lower debt to income ratios, and increased asset requirements have combined to make mortgages harder to get, but easier to pay off when home buyers and refinancers are properly vetted by lenders.
Possible changes are certain to come for Fannie Mae and Freddie Mac, even though the federally chartered companies have been leading the charge for more responsible lending. Projections indicate that revenues and profits for the mortgage giants will soar in the years to come as the U.S. housing market continues to recover. Since 2008, Fannie Mae and Freddie Mac have been improving the quality of their mortgages, which could also offer a bump in share prices. Lenders are much more strict these days in the loans that they give out, and subprime and Alt-A mortgage issuance is nearly non-existent.
The director of the Federal Housing Finance Agency, Mel Watt, recently announced that the current limits on the loan limits on mortgages that Fannie Mae and Freddie Mac can purchase will not be reduced. as previously expected. He felt that to do so would negatively affect the health of the $10 trillion housing financing market. Back in 2008, when the government rescued Fannie and Freddie during the financial crisis, both GSE’s received a total of $187 billion in taxpayer aid to bail them out. These mortgage giants have returned the entire amount of that bailout package, plus three percent more. Between the two giants, they finance about 60 percent of all U.S. mortgages.
A proposal has been made by President Barack Obama to gradually phase out Freddie and Fannie. His suggestion is to put the private sector at risk for the loans, not the government. Legislation for this “phase out” was approved by the Senate Banking Committee yesterday. The White House has endorsed this plan, which was pushed by two key senators. However, there are six key Democratic senators who are opposed to the measure.
Even though they have made a dramatic and profitable comeback, mortgage banking’s dynamic duo remain the poster children for the housing market crash and bad mortgage lending. The restructuring of the two agencies was part of the deal that was struck when the federal government bailed them out as part of a plan to prevent Fannie Mae and Freddie Mac from ever emerging again as private companies.
By Jill Boyer-Adriance
The Kansas City Star
The LA Times