The Department of Commerce released its final figure for first-quarter GDP growth this morning, revising it downward from 2.4% to 1.8%. In a Reuters poll, economists' estimates called for the figure to remain unchanged. Nearly all components of GDP growth were revised downward, with the notable exceptions of housing and government. Consumer spending -- the largest component of GDP -- came in at 2.6% growth, down from 3.4%.

Despite this news, investors in the U.S. stock market continue to shake off their macro jitters this morning, with the S&P 500 and the narrower, price-weighted Dow Jones Industrial Average up 0.81% and 0.79%, respectively, at 10:05 a.m. EDT.

Fannie and Freddie: future uncertainAt the beginning of the month, I highlighted government mortgage agencies Federal National Mortgage Association and Federal Home Loan Mortgage Corp. , commonly known as Fannie Mae and Freddie Mac. As the result of an extraordinary run this year, the stocks now have, to my knowledge, the highest market capitalization of any penny stocks in the U.S. market.


FNMA Chart

FNMA data by YCharts.

Unfortunately, a bipartisan group of senators is now presenting a bill to wind down both entities over a five-year period, which raises the possibility that equity owners could be wiped out. The bill would replace them with a Federal Mortgage Insurance Corporation, modeled on the Federal Deposit Insurance Corporation.

In aggregate, the two firms have received nearly $190 billion in taxpayer-funded injections in the wake of the credit crisis; the U.S. Treasury now owns roughly 80% of both companies. Fannie and Freddie are scheduled to repay $132 billion to the government at the end of the month.

At the beginning of June, fund manager Fairholme Capital Management, run by famed value investor Bruce Berkowitz, announced that it had acquired a $2.4 billion stake in the preferred shares of Fannie and Freddie (the preferred shares have also enjoyed a huge run-up in price, increasing more than 10 times in value from their 2012 low.) Fairholme has argued that the pair ought to be restructured, but not wound down, saying, "There are no substitutes."

As enticing as eye-popping returns can be, I would advise individual investors to refrain from betting on the outcome of this saga. There may yet be value in the federal mortgage agencies, but understanding their balance sheets and handicapping the political process requires time and expertise that ought to make this idea an automatic nonstarter for most investors.

The article Don't Touch Fannie Mae and Freddie Mac originally appeared on Fool.com.

Fool contributor Alex Dumortier, CFA has no position in any stocks mentioned; you can follow him on LinkedIn. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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AB

This is a recent statement from the Senate Housing committe chairman. The bill that's got investor's running for the hills isn't even on the Senate committeds to-do list yet. They have more pressing concerns. Plus the bill by Corker and Warner makes no sense at all.

OHNSON STATEMENT ON HOUSING FINANCE REFORM PROPOSAL

June 25, 2013

WASHINGTON – Today, Senate Banking Committee Chairman Tim Johnson (D-SD) released a statement on the introduction of the Housing Finance Reform and Taxpayer Protection Act.

“I thank Senators Corker and Warner for furthering the discussion and debate surrounding housing finance reform with this proposal,” said Chairman Johnson. “Reforming the nation’s housing finance system is critical to the long-term health and stability of the American economy, and Ranking Member Crapo and I plan to turn the Committee’s attention to broader housing finance reform after we address the more timely issue of FHA solvency. Ranking Member Crapo and I agree that any reform effort that moves through the Banking Committee must be bipartisan and include ideas and input from all members of the Committee.”

My question is this, Why would the government completely scrap Freddie and Fannie, only to create another government entity that does the exact same thing that Freddie and Fannie already does?

Maybe its because the government forced these corporations to buy all those bad mortgages to keep liquidity in the mortgage market. How then can the government blame these companies for doing what they were created to do? Maybe nothing is wrong with the corporations. Maybe its the government charter that needs to be revamped and/or changed.!!


J

June 28 2013 at 9:25 PM Report abuse +1 rate up rate down Reply
AB

DON'T BELIEVE ONE WORD OF IT!!! Freddie Mac and Fannie Mae being wound down in five years. IMPOSSIBLE!!! What happens to ALL of the mortgages that are OWNED BY THEM?!!! Sure the Government is just going to hand over $2-3 trillion dollars in assets to private investors or some newly formed entity that is unproven and nobody knows how it will operate. Plus, the Legislation don't sound like a change in how the secondary mortgage will work to me. It sounds like another BIG GIVE-A-WAY TO THE RICH by the government to me.

If the idea is to stop government bail-outs and let private investors take the risk, then maybe the legilation should be revamped to removed the "INVESTOR IMMUNITY" clause of it.

Its got a long ways to go before it reaches the Presidents desk and I find it impossible to believe that he would sign it.

June 26 2013 at 10:12 PM Report abuse rate up rate down Reply