Fairholme Capital Management Announces Proposal for Purchase of Insurance Businesses from Fannie Mae and Freddie Mac

Source: BusinessWire via StreetAccount

  • Fairholme Capital Management (“Fairholme”) announces that it has submitted a proposal to relevant federal government officials for the purchase by private investors of the mortgage-backed securities insurance businesses of the Federal National Mortgage Association (“Fannie”) and the Federal Home Loan Mortgage Corporation (“Freddie”).
  • The proposal:
    • Brings approximately $52B of private capital to support credit risk on more than $1T of new mortgages without market disruption;
    • Allows for the liquidation of Fannie and Freddie, ending their Federal charters and special status, without losing the value of operating assets critical to the mortgage market;
    • Reduces systemic risk by separating new underwriting from the legacy investment books of Fannie and Freddie; and
    • Preserves Government options for affordable housing initiatives and counter-cyclical liquidity – but using tools other than Fannie and Freddie.
  • The centerpiece of the proposal is the establishment of two new, State-regulated private insurance companies to purchase, recapitalize, and operate the insurance businesses of Fannie and Freddie. The new companies would have no Federal charter or special status, and the names “Fannie” and “Freddie” would be retired and never used again. The legacy book of investments and insurance in existence on a specified cut-off date would be wound down over time, with the proceeds used to fully repay the U.S. Treasury for its investments in the companies as well as provide a fair profit on that investment. The new companies and their private owners would earn profits only from the new business written by the State-chartered insurers after the cut-off date.
  • The new companies would require no subsidy or support from the United States Government to begin profitable business immediately. However, the business model of the new companies would be compatible with a Federal reinsurance program or other Federal intervention in the market.
  • The proposal contemplates a number of conditions, including the support of the Federal Housing Finance Agency, the U.S. Treasury, and other investors in Fannie and Freddie. Fairholme has conferred with many investors who support this proposal. A copy of the proposal will be made available online at www.fairholmefunds.com.
  
 
Private investors want to take control of bulk of Fannie, Freddie - FT
  • The FT said that a group of prominent hedge funds and private equity firms is preparing a proposal to take over large parts of Fannie and Freddie.
  • According to the paper, the group wants to take control of the GSEs' core business of guaranteeing mortgage-backed securities, in two newly-capitalized insurance companies.
  • It noted that Fannie and Freddie’s portfolio of previously-written guarantees and mortgage holdings would stay in government hands to eventually be wound down.
  • Citing a presentation document it has seen, the paper said that the group proposes to capitalize the new insurers by converting their preferred securities into common equity and then carrying out a $17.3B rights issue.
  • The article discussed the numerous headwinds facing the proposal, particularly the bipartisan push in Washington to wind down the GSEs.
The original release can be found here >>

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