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White House Rejects Fannie-Freddie Recapitalization Plans

By NICK TIMIRAOS
Updated Nov. 20, 2013 7:43 p.m. ET

The White House dealt a setback to a prominent investor’s bid to recapitalize Fannie Mae and Freddie Mac, saying that a restructuring alone wouldn’t put the $10 trillion U.S. home-loan market on sounder footing.

Gene Sperling, President Barack Obama‘s top economic adviser, said the administration views a sale or recapitalization of the mortgage companies as a nonstarter because it wouldn’t address their central role in mortgage finance. Mr. Sperling’s remarks follow a proposal last week by investor Bruce Berkowitz of Fairholme Capital Management LLC to restore value to the companies’ shares. Mr. Sperling didn’t address the Fairholme proposal specifically.

The government bailed out the companies in September 2008, staving off an outright collapse in the U.S. housing market but imposing terms that led to a plunge in the value of the firms’ common and preferred shares. The futures of Fannie, Freddie and the U.S. housing market have been a subject of continual debate in Washington since the companies, facing tens of billions of dollars of losses on mortgage defaults in the housing bust, were placed under government control.

Fairholme views its proposal, which would restyle Fannie and Freddie as state-regulated bond-insurance companies, as having negotiable terms and already includes possible limits on the market share of the new companies, a Fairholme representative said.

“I want to make clear our administration believes the risks are simply too great that this would re-create the problems of the past,” said Mr. Sperling, director of the White House’s National Economic Council, at a conference in Washington.

Fannie and Freddie don’t make loans. Instead, they buy them from lenders and package them into securities that are then sold to investors with guarantees to make investors whole if the underlying loans default. That has created deep, liquid markets for mortgages, particularly the 30-year fixed-rate mortgage that isn’t widely available in other countries.

Saving the companies at the height of the financial crisis required taxpayer infusions that ultimately totaled $188 billion. But with the U.S. housing market rebounding and the economy gradually expanding amid low interest rates and growing employment, Fannie and Freddie have become very profitable over the past year.

They will send $39 billion to the U.S. as a dividend payment next month, and by early next year they are likely to have repaid more in dividends to the government than the amounts the U.S. injected into the firms over the past four years. The U.S. government has warrants to acquire nearly 80% of the common stock of both companies; it hasn’t exercised them.

Fairholme last week made a proposal to recapitalize the companies using the preferred shares of both. Two days later, las Friday, William Ackman‘s Pershing Square Capital Management LP disclosed nearly 10% stakes in the common shares of both companies. A Pershing spokeswoman declined to comment.The moves set off the latest surge in the companies’ shares, which aren’t listed by any major U.S. exchange following a 2010 delisting. On Wednesday, shares of Fannie rose 23 cents, or 8.9%, to $2.76, and Freddie rose 18 cents, or 7.7%, to $2.52. The companies’ shares have mostly traded below $2 since the government takeover in 2008.


Gene Sperling says a Fannie and Freddie
recapitalization is a nonstarter.
Associated Press

Mr. Sperling said the administration isn’t willing to entertain proposals to recapitalize parts of the companies and sell them back to investors because it wants to rebuild a stronger mortgage market not dominated by two large institutions.

Even if restructured, Fannie and Freddie would retain significant advantages over any new entrants, Mr. Sperling said, because they have relationships with hundreds of lenders and economies of scale that could confer funding advantages, among other benefits.

“New entrants to the market would have a sensible reason to fear that they would find competing against this structural advantage to be prohibitively costly,” Mr. Sperling said. “All of us should fear that we could re-create a duopoly that the market would perceive as too-big-to-fail market entities.”

The administration and top Republicans and Democrats haven’t shown any support for a recapitalization or sale of the companies, but a consensus has been building that supports allowing new mortgage-bond guarantors to purchase government insurance for loans that are sold to investors. It isn’t clear exactly how those firms would be capitalized.

Mr. Sperling said he was optimistic that bipartisan discussions between the Democratic and Republican heads of the Senate Banking Committee would create an opening for the government to address the futures of Fannie and Freddie.

He said an earlier bill introduced by Sens. Bob Corker (R., Tenn.) and Mark Warner (D., Va.) in June to replace Fannie and Freddie with a new system of federal reinsurance of mortgage-backed securities was a “good and constructive” start and that while the administration didn’t support every piece of it, the areas of disagreement were “bridgeable,” he said. Five additional Republicans and four Democrats have co-sponsored the Corker-Warner bill.

“There is genuine bipartisan progress on this issue,” he said.

Some advocates of recapitalizing Fannie and Freddie as new mortgage-bond guarantors say that other proposals simply won’t meet the policy goals of the administration. “No one has suggested a workable alternative to recapitalize the mortgage-guarantee businesses of Fannie and Freddie as a responsible way to transition to the new system,” said Jim Millstein, a former Obama administration official who oversaw the restructuring of American International Group Inc. He has invested in Fannie and Freddie.

—Juliet Chung contributed to this article.

Write to Nick Timiraos at nick.timiraos@wsj.com

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