New Fairholme-Backed Group Rallies to Defend Fannie, Freddie

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• NICK TIMIRAOS

Bloomberg News

Fannie MaeFNMA +3.68% and Freddie MacFMCC +2.84% haven’t been allowed to lobby in Washington since the government took over the two mortgage giants in 2008. And thanks to some of the companies’ deep-pocketed new friends, the companies may not need to anytime soon.

Fairholme Capital Management LLC, which has invested massive sums in Fannie and Freddie, has funded a new advocacy group that is running ads defending the mortgage-finance companies amid a bipartisan effort to replace the firms with a new public-private mortgage setup.

The group, which calls itself United for American Homeownership, is the latest in a string of advocacy groups lobbying on behalf of Fannie and Freddie’s shareholders. Earlier this month, a group calling itself the Coalition for Mortgage Security began a pro-Fannie advocacy effort, and a group that says its representing the interest of conservative seniors, the 60 Plus association, has bought at least $1.6 million intelevision and radio ads targeting lawmakers that are supporting the bipartisan Senate bill, arguing that the legislation would harm investors in Fannie and Freddie.

The groups are registered as tax-exempt organizations that, under federal rules, don’t have to disclose donors and can spend large sums on political advocacy as long as they promote social welfare. While the other groups have declined to say who is bankrolling their advocacy, a spokesman for the United for American Homeownership outfit said Fairholme had provided the initial funding for the group.

United for American Homeownership counts among its directors former Nebraska Sen. Bob Kerrey, who began working last year as a lobbyist for the Carmen Group, a lobbying firm in Washington.

A statement attributed to Mr. Kerrey said, “Eliminating trusted institutions like Fannie and Freddie is a dangerous idea, and one that United for American Homeownership is prepared to fight all the way.”

A Senate committee is set to take up this week legislation that would replace Fannie and Freddie with a new system of federal mortgage reinsurance. The bill could be a money loser for Fairholme, the Miami-based mutual-fund company, and other shareholders, including many hedge funds that have made big bets on the mortgage firms’ survival. Hedge funds and other distressed equity players stand to earn big profits if Fannie and Freddie are restored as private companies.

Consumer groups say they’ve been approached in recent weeks to sign on to the campaign. The latest ad campaign “does not look to me like a genuine expression of concern,” said Ethan Handelman, vice president of the National Housing Conference, a consumer group that was approached by the advocacy group earlier this month.

The advocacy effort is the latest in a series of efforts by Fairholme, run by renown investor Bruce Berkowitz, to preserve its investment in the preferred and common shares of Fannie and Freddie. Last month, Fairholme blasted the companies’ boards for failing to protect the rights of shareholders. Last year, it was rebuffed by the White House when it floated a proposal to use its existing investment to recapitalize Fannie and Freddie and operate them as state-regulated bond guarantors. It has also sued the Treasury to challenge the government’s bailout terms, which prevent the companies from recapitalizing, and a judge has granted discovery to Fairholme in one of those lawsuits.

The Obama administration began requiring Fannie and Freddie to send all of their profits to the Treasury as dividend payments last year. Investors say the changes amounted to illegal self-dealing between the Treasury and the firms’ federal regulator. The Treasury is fighting more than a dozen lawsuits.

Fannie and Freddie were taken over by the government in 2008 as the financial crisis was building, and the companies ultimately required $188 billion in Treasury infusions. Buoyed by a nearly explicit federal guarantee of their debt, the companies became very profitable as housing markets stabilized over the past two years, and they have now sent $203 billion in dividends to the U.S. Treasury.

“When Fannie and Freddie needed help, America was there for them,” a narrator says in the advertisement from United for American Homeownership, which celebrates the firms’ recent profits that have made taxpayers whole. “Together, we’ve created one of the greatest comebacks in our nation’s history.”

Other large investors that have invested in the companies’ common and preferred shares include Pershing Square Capital Management LP, Claren Road Asset Management LLC and Perry Capital LLC. Perry Capital, Paulson & Co., and Marathon Asset Management are among firms that have hired lobbyists in Washington to represent them on housing-finance issues, according to Senate lobbying disclosure forms.