Fairholme Capital Management has come up with an intriguing plan that seems to mesh with all reform proposals on the table when it comes to housing finance reform.
The Fairholme plan will work regardless of whether Congress decides to provide some form of a government guarantee for mortgage-backed securities. It seems to fit in with Democratic government-sponsored enterprise reform proposals, Republican proposals and even bipartisan proposals. (To see a related slideshow of the different types of GSE reform currently on the table, click
It is the kind of plan that Woody Allen’s character Leonard Zelig would admire because it blends in so well with every scene.
The job of liquidating the GSEs’ investment portfolios and managing their current mortgage guarantee books of business would be left to the current GSE regulator and conservator, the Federal Housing Finance Agency.
One of the FHFA’s priorities is merge Fannie and Freddie’s securities platforms and create a common securities platform. FHFA is expecting to select a chief executive soon to oversee that project.
That poses no problem under Fairholme’s proposal. The Miami-based investment management firm claims the new MBS insurance companies will have the ability to build it, and common securities platform will be open to other MBS issuers.
For small lenders that want to sell their loans for cash the new entities are supposed to provide a
The main GSE reform proposals that the House and Senate banking committees are working with wind down Fannie and Freddie over five years and liquidate their remaining assets.
A bi-partisan bill sponsored by Senators Bob Corker, R-Tenn., and Mark Warner, would create a new federal regulatory agency that would oversee the secondary market and require private MBS issuers to take a first loss position. This agency would also provide government-backed insurance to protect MBS investors from catastrophic losses.
The PATH Act approved by the House Financial Services Committee provides no guarantees on conventional loans or MBS that Fannie and Freddie currently guarantee.
Whatever Congress decides, Fairholme believes the newly privatized MBS insurers will be profitable. And FHFA can approve the sale of the GSE’s MBS units now without restricting Congress’ legislative options.
Congress is unlikely to pass a GSE reform before the 2014 elections and many observers believe it could take several years.
Fairholme wants the GSE regulator to act soon. The GSEs have been lingering in conservatorship for five years and they have nearly paid back all their government assistance, according to Fairholme managing director Bruce Berkowitz. “The time to get the businesses capitalized is now,” he says in letter to the GSE regulator.
So far, FHFA has declined to comment on the proposal.
Most observers consider the Fairholme Plan dead on arrival because it is too opportunistic a move from the private sector. However, hedge fund manager Bill Ackman has stepped up his purchases of GSE stock and Pershing Square Capital Management LP currently controls nearly 10% of Fannie and Freddie stock. This move could put more pressure on the GSE regulator and Treasury Department to negotiate or face a long legal fight.
