Fairholme Capital Management is offering to privatize Fannie Mae and Freddie Mac’s mortgage guarantee businesses and leave the government with the job of managing the GSEs’ remaining investment portfolios and current mortgage guarantee books of business.
The Miami-based investment management firm claims the government would get a good return on the current books of business which are quite profitable right now.
Meanwhile, Fairholme would transfer the GSEs’ employees, intellectual property and infrastructure to newly created entities that issue privately insured mortgage-backed securities.
These former Fannie and Freddie entities would be regulated by state insurance agencies and operate from day one with no federal government support.
If the Federal Housing Finance Agency agreed to such a transaction, Fairholme would recapitalize the securitization businesses by raising a $17 billion in new capital and using existing Fannie and Freddie preferred stock.
The GSE regulator declined to comment on Fairholme’s offer, which the Miami firm disclosed late Wednesday.
Fairholme claims it is making a viable, credible offer to the GSE conservator and that will bring private capital into the mortgage market.
However, Fairholme owns Fannie and Freddie preferred stock which currently trades at 30 cents per share. It was devalued when the Treasury Department stopped paying dividends on the preferred shares last year.
If FHFA and Treasury agree to the Fairholme proposal, the preferred stockholders could convert their shares into common stock of the new private MBS entities. That capital would be locked up for five years. After five years they could collect dividends or sell the common stock.
Such a deal would render the lawsuit mute and potentially increase the value of the preferred stock to $34 billion.
