Treasury Secretary Mnuchin Confirms Fannie Mae & Freddie Mac Profits Used To Fund ObamaCare

Summary

  • On Mat 1st, Treasury Secretary Mnuchin confirmed GSE profits were used to fund parts of the government such as ObamaCare
  • Secretary Mnuchin stated last week they are being "very careful in fixing Fannie and Freddie"
  • Rep. Jeb Hensarling, someone who has advocated in the past to shut down Fannie and Freddie is now full on for privatizing the two
  • Fannie and Freddie investors continue to seem extremely positive developments.


On Monday morning Mrs. Bartiromo on her Fox show "Mornings With Maria" had a discussion with Treasury Secretary Steven Mnuchin on a variety of topics. One of those topics was Fannie Mae (FNMA) and Freddie Mac (FMCC). The two companies have been under conservatorship since 2008 and in recent months there has been much speculation as to whether or not Fannie and Freddie profits while under conservatorship were being used to fund ObamaCare and other parts of the government. Today we finally have that answer out of the mouth of Treasury Secretary Steven Mnuchin himself. The answer: YES.
Mrs. Bartiromo's question:
There is a conversation going on, on Twitter and has been for a long time about how President Obama needed money for ObamaCare and would take from all of the agencies and he took from Fannie and Freddie, is that true?
Secretary Mnuchin response:
It is true, they used the profits of Fannie and Freddie to pay for other parts of the government while they kept taxpayers at risk.
Here is the link to see the response, Fannie topic begins after 3:55. 










Investment Thesis:
In 2008, the United States Treasury took over Fannie Mae and Freddie Mac and placed them in conservatorship under the control of the Federal Housing Finance Agency (FHFA). FHFA and Treasury claimed their actions were justified because of extreme losses and a deterioration in the housing market that hurt Fannie and Freddie. Treasury and FHFA claimed both companies were in financial distress and in dire need of capital. Treasury would provide taxpayer funds by the use of a non-cash accounting trigger known as "net assets" and, in return, receive a 10% cash dividend rate. Treasury announced this was temporary and they would return the companies to the private sector once profitability returned and the housing market stabilized. By the end of 2012, Fannie and Freddie had been forced to draw $187 billion. In 2012, the companies were showing profits and the housing market was stabilized. Time to release them back to the private sector, right? Nope, in late 2012, Treasury amended the 10% cash dividend and decided to sweep the entire "net worth" each quarter starting Q1 of 2013, claiming it was to avoid a death spiral within the GSEs. In 2013, immediately when Treasury implemented the sweep, Fannie and Freddie posted record profits totaling more than $130 billion combined by year end. It all went directly to the government. Coincidence? I think not. Treasury was well aware of the imminent profits as documents have proven and did so to avoid a recapitalization. Since the time of the sweep, Fannie and Freddie have returned $265 billion, $78 billion more than what they borrowed. And, in fact, when you analyze Fannie and Freddie's financial condition, one can see the tricky accounting FHFA implemented to balloon losses to force Fannie and Freddie to draw funds even if they had plenty of cash on hand. These two companies are extremely important to housing and the economy. With over $5 trillion of outstanding mortgages on their books, they are effectively the two most important companies in America. Without them, there is no affordable 30-year pre-payable fixed rate mortgage. The sweep is going to end and, ultimately, I believe there is only one viable, realistic solution to what happens to Fannie and Freddie. The government stops the net worth sweep, recapitalizes them, continues reforming them to a sound business model like it has done so during conservatorship and releases them from government control back into the private sector while maybe keeping a piece of the pie. With that, I own shares of preferred and common stock in both companies and both classes of stock hold multi-bagger potential from today's levels.
Secretary Mnuchin 
After a discussion with Mrs. Bartiromo on her show "Mornings With Maria", Secretary Mnuchin was interviewed by her at the 2017 Milken Institute Global Conference. Here is what he had to say:
The housing market is something I've known a lot about, I've been around for 30 years and have followed the history of Fannie Mae and Freddie Mac very closely. We are determined that there will be housing reform, its not a priority of the first 6 months, although we have had a bunch of meetings on, we will focus more on in the second half of the year. what I have said is, we can't leave Fannie and Freddie as is for the next 4 years. We need to make sure we solve these problems, right now the Treasury has a giant line outstanding to them, so we need to fix that, we need to make sure that on the one hand we have liquidity in the housing markets, thats a very very important part of the economy, on the other hand we can't have taxpayers at risk through the Treasury's support. It is in my top 10 of priorities, whether it is the end of this year or beginning of next year thats the timeline we are looking at. We'll reach out to lots of different people to figure out the proper role for them (Fannie and Freddie) going forward. 
Last week at "The Hills Newsmaker" Secretary Mnuchin said this regarding Fannie and Freddie:
We want to be very careful in fixing Fannie and Freddie, that we don't create a bigger problem at FHA. 
"We want to be very careful in fixing Fannie and Freddie"... The Secretary of Treasury literally just told the public we are fixing Fannie and Freddie and are doing so in a very careful manner!
Rep. Jeb Hensarling 
On Sunday, April 30, 2017 Rep. Jeb Hensarling was on "Sunday Morning Futures" with Maria Bartiromo who asked him:
Maria: 
Real quick sir, are Fannie and Freddie privatized, is that on your agenda over the near term?
Rep. Hensarling:
Absolutely, we have got to reform our housing finance system

What To Understand
These developments are incredibly important for Fannie and Freddie investors. We have the Secretary of Treasury admit the companies were used to fund ObamaCare and other parts of the government. This changes the entire narrative behind what conservatorship was designed to do and should play a major part in current ongoing litigation.  
Conservatorship is intended to stabilize troubled institutions with the objective of maintaining normal business operations and restoring financial safety and soundness. 

Goals of Conservatorships

The overall goals of the conservatorships are to:
  • help restore confidence in Fannie Mae and Freddie Mac
  • enhance their capacity to fulfill their mission, 
  • and mitigate the systemic risk that contributed directly to instability in financial markets.
How in the world is stealing 100% of the profits from Fannie and Freddie to pay parts of the government including ObamaCare legal!? 
In accordance with the Federal Housing Enterprises Financial Safety and Soundness Act of 1992 as amended by HERA, FHFA is authorized to “take such action as may be: (I) necessary to put the regulated entity in a sound and solvent condition; and (ii) appropriate to carry on the business of the regulated entity and preserve and conserve the assets and property of the regulated entity.”
"Preserve and conserve the assets"... Last time I checked cash is listed as an asset and when the government decided to steal 100% of Fannie and Freddie profits to fund parts of the government such as ObamaCare that is completely against what conservatorship is supposed to do.
Going Forward
Secretary Mnuchin is the most important person for Fannie and Freddie investors and he continues to reiterate how important the two companies are and how committed he is to achieve housing reform. He literally told the public they are fixing Fannie and Freddie and has even given us a timeline of housing reform happening by the end of this year or early 2018! Even if it takes a little longer than the that, the only logical outcome that is in the best interest for taxpayers, investors, and the government is to reform Fannie and Freddie into a utility business model, uphold the original agreement the government made with shareholders in 2008 and implement a reformed, recapitalized Fannie and Freddie with a new housing policy. What is also quite important to note is Rep. Jeb Hensarling, someone who has in the past wanted to shut down Fannie and Freddie is now advocating to privatize them. The narrative is changing and the truth is finally coming to light regarding the two entities. They did not cause the financial crisis, they were in fact the best performers throughout the crisis. Fannie Mae and Freddie Mac effectively control the availability of financing for homeownership in America and since housing equates to roughly 20% of GDP they are the most important businesses to the economy. It is time for this 8 year saga of conservatorship to be put to an end. 
In my opinion, it is not a matter of if but when the companies are reformed and released. I most expect them to be reformed similar to that of a utility in which the companies will hold lots of cash on hand and be well capitalized while the government will hold some regulatory authority over the two. When this occurs the only remaining questions is how are current investors treated when it comes to their current ownership of preferred and common stock. I ultimately believe the preferred will begin paying dividends at a future date when the reform occurs. The common is a bit more tricky due to the government having warrants for 79.9% of each companies outstanding common stock which could result in a major dilution of the shares. With that being said I still believe there is substantial upside from the current common price of both Fannie and Freddie of $2.81 and 2.70 (May 1st). Preserve Fannie and Freddie and the original deal, preserve the 30-year pre-payable fixed rate mortgage and preserve mortgage liquidity. 
Something to watch in upcoming days is Secretary Mnuchin at the ICBA Capital Summit this Wednesday, May 3rd. ICBA has recently laid out a plan to reforming Fannie Mae and Freddie Mac and the group has met with President Trump and Secretary Mnuchin multiple times in recent months. 
In case your unfamiliar with Secretary Mnuchin here is a previous article I have written covering the Secretary and why he is so important and beneficial for Fannie and Freddie investors. 
Disclosure: I am/we are long FNMA, FMCC, FNMAS, FMCKP, FMCKJ, FNMAT. I wrote this article myself, and it expresses my own opinions. I have no business relationship with any company whose stock is mentioned in this article.
Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks. 

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