$52 billion for FNMA by Fairholme Capital Management
Fannie Mae, Freddie Mac attract investor groups
Investor groups are scooping up shares of Fannie Mae and Freddie Mac and even offering to buy core pieces of their businesses, complicating legislative efforts to shut down the two mortgage giants.
Some Capitol Hill lawmakers have been clamoring to shutter the companies ever since the government seized them at the height of the 2008 housing crisis. President Obama also has publicly called for an end to the two institutions.
But investor groups are presenting a political wrinkle.
The housing market is on the mend, and investors are betting that Fannie and Freddie are poised for a comeback. They have bought massive numbers of shares in each company on the cheap, and they are making it known that they see value in their investment.
Last week, Fairholme Capital Management offered to take over key portions of Fannie and Freddie, infuse them with $52 billion in capital and run them as private companies. The proposal prompted Pershing Square Capital Management, a fund run by activist investor William Ackman, to take 10 percent stakes in the companies a few days later.
“It’s harder to shut down Fannie and Freddie when there are people out there willing to pay something for them,” said Guy Cecala, publisher of Inside Mortgage Finance. “The last thing you want to do when you have cash cows is kill them.”
D.C.-based Fannie and McLean-based Freddie do not make loans. They buy them from lenders, package them as securities and sell them to investors. They also insure mortgages, paying the investors should the loans go bad. Fairholme, led by Bruce Berkowitz, wants the insurance portion of the business.
Going into the housing crisis, Fannie and Freddie were publicly traded companies. But the market assumed that the government would step in if there were extraordinary losses, which indeed it did, giving the institutions $188 billion in bailout money. The companies were widely blamed for exacerbating the financial crisis by buying millions of risky loans and passing on the risk to taxpayers.
The government is expected to recoup an amount equal to its investment by early next year. Fannie’s payments to the Treasury Department will total $114 billion by the end of the year, and Freddie will have paid$71 billion , the companies reported earlier this month.
All profits generated by Fannie and Freddie have been going to the Treasury since August 2012, which will continue indefinitely. Ten investor groups, including Fairholme, are challenging the arrangement in court.
Any move to restructure and privatize Fannie and Freddie would need the government’s approval. What policymakers want to avoid is a return to the old structure, one in which the desire for private profit exposed the public to unreasonable risks.
Fairholme says its takeover plan is the solution.
“We’re trying to help Congress,” said Berkowitz, whose fund owns nearly $3.5 billion in preferred shares of the mortgage-finance giants. “The government has every right to change its relationship with the housing market. Our plan addresses those future changes.”
But the White House has bristled at the idea of having two large institutions dominate the mortgage market.
“The risks are simply too great that this would recreate the problems of the past,” Gene Sperling, director of the White House’s National Economic Council, said at a conference Wednesday. “The only credible way to end the failed business model of Fannie Mae and Freddie Mac is through comprehensive housing finance reform.”
The Fairholme plan has gotten a lukewarm reception on Capitol Hill, at best. Lawmakers are likely to distance themselves from any plans that could be perceived as enriching money managers, no matter its merits, said Isaac Boltansky, an analyst with Compass Point Research & Trading.
“Simply put: Wall Street is not viewed as a sympathetic constituency in D.C. and that fact will not change as the 2014 midterm election comes into focus,” Boltansky wrote in a recent note to clients.
But perhaps the frenzied activity by investor groups will push Congress to move on legislative proposals aimed at reforming the mortgage market, said David Stevens, chief executive of the Mortgage Bankers Association.
One bill, introduced by Sens. Bob Corker (R-Tenn.) and Mark R. Warner (D-Va.), would replace Fannie and Freddie with a new regulator that would shift more of the risks of mortgage lending to the private sector.
“There’s a lot of concern about putting too much change into an already tenuous market place,” Stevens said. “But selling these guys off in pieces could have a far more dramatic effect in the market system.”
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