Their business is insuring investors from losses on mortgage-back securities. I am going to copy and paste a private communication of mine from not long ago, perhaps it will be enlightening or at least informative (some editing and simplification was done, might not read perfectly):
...The only reason anyone has ever paid for that insurance is because (a) there was a relatively small amount of private capital invested in Fannie and Freddie available to cover any losses and (b) to the extent that private capital was not enough to cover losses there was near certainty hat the Treasury would backstop the difference/bail out Fannie and Freddie. Fannie and Freddie could invest that capital until it might be needed to cover losses, and generated a profit from investments in addition to insurance premiums (guaranty fees). Fannie and Freddie levered their private capital and invested in huge portfolios of mortgages and MBS to earn an investment return...
Today, (a) is gone and only (b), the Treasury's bail out capital, remains. Today, Fannie and Freddie are profitable for three reasons: (1) they continue to be paid guaranty fees in exchange for insuring MBS, (2) they earn a huge spread between the yield on their mortgage investments (>3.5%) and their cost of borrowing (<2%, and (3) a number of nonrecurring valuation related items (namely reversal of DTAs and loss provisions) have been recently unwound.
None of these is due to Fannie and Freddie having any kind of a business other than loaning out the Treasury's credit:
- The valuation changes are accounting fiction and will not be accretive going forward.
- The spread on the mortgage book is due to the bond market's perception that Fannie and Freddie debt is an obligation of the US Treasury; otherwise the rate on the debt would be extremely close to the underlying yield as there is no Fannie or Freddie equity capital in those investments.
- The guaranties provided by Fannie and Freddie are worthless without the US Treasury's support, as no private capital remains in either company (not to be confused with private interests, the capital is gone but the interests/securities remain).
Consequently I have to conclude that Fannie and Freddie do not have any going concern value without US Treasury support, extending US Government support for the housing market on behalf of the Treasury is their business.
Now, if they can raise fresh private capital around the value of that support as they did when first privatized, nominally they could return to the status quo. Indeed, some private capital has shown interest in that idea (namely Berkowitz and co). However, no one in Congress appears supportive of this plan (one of our mutual friends described the GSEs as "toxic") and they have no legal obligation to allow for such action. The legal concept of the conservatorship includes no consideration for private shareholders. Once the companies are in conservatorship due to capital inadequacy, they have no fiduciary duty to private shareholders (in that, not unlike FDIC receivership). Finally, the conservatorship was apparently established when the GSEs raised private capital, so the Treasury's disregard for private shareholders during conservatorship (namely the profit sweep) is only in accordance with private capital's original agreement with the government - not in essence, as Perry and others have argued, a change of the agreement, a takings...
This last point seems to be the key point of misunderstanding between existing GSE shareholders and proponents of reform... Perhaps today's shareholders - the prominent of whom are newcomers - lack the historical perspective to understand the deal they had.