Private Investor Intervention
Fairholme Capital Management would privatize Fannie Mae and Freddie Mac's mortgage guarantee businesses and create two newly capitalized entities that issue privately insured mortgage-backed securities. The plan will work regardless of whether Congress decides to provide some form of a government guarantee for mortgage-backed securities. Most observers consider the Fairholme plan dead on arrival because it would be a very opportunistic private sector play. However, hedge fund manager Bill Ackman (pictured) 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. Photo: Bloomberg News.
Keep Fannie Mae and Freddie Mac, but Shrink Them
Fannie Mae and Freddie Mac are showing signs of long-term profitability so why make major changes? The GSEs could continue to support the secondary market and gradually reduce their investment portfolios and risks to the taxpayers with a few tweaks. Their regulator, the Federal Housing Finance Agency, has already done this to some extent through risk-sharing and portfolio reductions that could continue without the need for new legislation. Critics fear this fails to do enough to mitigate the kind of systemic risk Fannie Mae and Freddie Mac took on during the most recent downturn. Image: Fotolia.