Fannie Mae Rebound?

Brian Hicks

Updated May 1, 2013

Even as Congress mulls over liquidating Fannie Mae (OTCBB: FNMA) and Freddie Mac (OTCBB: FMCC), certain major hedge funds, such as Henry Paulson’s Paulson & Co. Inc., are rounding up lobbying support against the notion.

fannie freddie taxpayersIt appears that the recent rebound in Fannie’s and Freddie’s finances (both companies are owned by the government) has initiated hopes among investors that the companies might be saved in private hands.

Never mind that such a move is deemed unlikely by the U.S. administration; preferred shares for Fannie have been climbing steadily since March. Having more than doubled, Bloomberg reports that shares closed at $4.75 Monday.

The larger concern here is that of the housing market itself. The notion of Fannie and Freddie becoming profitable again directly impacts any plans about reforming housing finance in this country.

These two companies together hold more than half of all outstanding home loans, but the terms of the debate focus more on how private investments can be drawn back into the mortgage market after the epic financial crisis and housing bust. Further, the government is working on figuring out how far it can go in assuming mortgage risk in years to come.

Financial Crisis

Fannie and Freddie played a big role in the housing/financial crisis, since the companies exist to purchase mortgages from lenders and repackage them as securities, upon which basis they are guaranteed principal and interest payments. And as we may recall, it’s their high-risk moves that ended in an enforced bailout by the taxpayers.

Right now, the U.S. Treasury has $188.5 billion in both companies in the form of senior preferred notes. That’s how much the taxpayers have poured in to help Fannie and Freddie survive. The companies, for their part, have returned just $65.2 billion in dividends.

And that doesn’t even count as repayment; it’s just return on investment. In other words, there’s basically no way for the companies to actually accumulate any capital, since all the profits end up with the Treasury anyway.

Now, Fannie has reported earnings of $17.2 billion for the past year. And Freddie reported earnings of $11 billion over 2012. Both companies had losses for 2011. Should the upward pattern (and the newly resurgent housing market) continue, then over the next ten years, taxpayers stand to earn $50 billion (per White House projections).

That’s where the hedge funds and their lobbying comes in. According to them, selling off the U.S. government’s shares and recapitalizing both companies would end in a much bigger return, while also ensuring that investors holding preferred shares stand to gain. In short, they want to buy up the Treasury-held shares.

Millstein and Privatization

According to James Millstein, recapitalizing Fannie and Freddie and selling off the Treasury holdings would wind up providing taxpayers with $100-$190 billion in profits. Millstein is the former Treasury official who managed the AIG restructuring, so he should have some idea of how this might play out.

But others’ opinions differ. Fannie and Freddie regulator Edward J. DeMarco, for example, believes such a privatization occuring when the larger mortgage finance market has yet to really be reformed would be a very shaky move.

The big picture here appears to be simple. People like Kyle Bass of Hayman Advisors LP and Jeffrey Bernardo of Augustine Asset Management—in other words, investors with significant stakes in Fannie and Freddie—are pushing for privatization, hoping for a pot of gold at the end. On the other hand, the government currently has absolutely no plans to think about privatizing the two companies.

Some of the major players pushing for privatization are Paulson & Co., Perry Capital, and Claren Road. All hold preferred stock in Fannie Mae.

Paulson does command significant regard when it comes to housing matters; in fact, he earned in excess of $15 billion around the time of the housing bust through careful wagers. However, the big problem right now is that there’s zero support for the idea of privatization from the government.

Just back in March, several lawmakers led by Elizabeth Warren (D-Mass.) and David Vitter (R-Louisiana) put forward a bill that would put an end to sales of senior Treasury preferred shares without Congressional approval, making it all but certain that Fannie and Freddie won’t get away from governmental oversight regardless of how much they repay. It’s a bit draconian, but perhaps a reaction to their excesses in the years of crisis.


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