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

Private Investors Would Commit Approximately $52 billion of Capital as First Members of a Competitive Industry

Insurance Business Plan Requires No Government Support

Proposal Allows for Orderly Liquidation of Historical Assets of Fannie Mae and Freddie Mac

MIAMI--()--Fairholme Capital Management (“Fairholme”) today announced 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 answers the bipartisan call for significantly more private capital in the mortgage market, and is intended to facilitate legislative reform of any political stripe. In particular, the proposal:

  • Brings approximately $52 billion of private capital to support credit risk on more than $1 trillion of new mortgages without market disruption;
  • Demonstrates reform is possible, even without a Federal guarantee, by having investors commit to bear risk now;
  • 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;
  • Preserves Government options for affordable housing initiatives and counter-cyclical liquidity – but using tools other than Fannie and Freddie; and
  • Ends the unsustainable Federal conservatorship.

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 companies would be capitalized with approximately $34.6 billion in exchange for preferred stock in the entities, and at least $17.3 billion of new capital raised from preferred stockholders in a rights offering. The two new companies would operate a conservative business plan and would be regulated by State insurance authorities as well as applicable Federal agencies. All capital received in the conversion of preferred stock of Fannie and Freddie, along with attributable profits, would be retained by the new companies as locked-in capital for a minimum of five years to support writing new insurance. No dividends or distributions would be paid using that capital during this initial five year period.

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 new companies could be cornerstone participants in a reinsurance program along the lines contemplated by proposals under discussion in the Senate, if that is the result of the legislative process now underway. Alternatively, the new companies could serve as cornerstone participants in a new, competitive market with less Federal involvement, such as proposals being contemplated in the House, putting their private capital at risk to achieve the best possible pricing and availability for mortgage borrowers under those parameters.

“We know that many people in and outside of government are working on the redesign of the mortgage market, and trying hard to get it right for America,” said Bruce R. Berkowitz, Managing Member and Chief Investment Officer of Fairholme Capital Management. “This proposal answers the broad bipartisan call for private capital in a way that can advance reform from concept to a viable, sustainable solution. Fannie and Freddie’s business model was not consistent with insurance industry best practices. However, in this country we fix valuable businesses by restructuring; we do not simply throw them away. Fairholme is prepared to do its part to help effectuate this restructuring and to be long-term owners of the insurance businesses, without the need for any Federal assistance or special Federal status.”

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.

Nothing contained in this release constitutes investment advice. No information or opinion contained in this release constitutes a solicitation, recommendation, or offer by Fairholme or its affiliates to buy or sell any securities, futures, options, or other financial instruments.

Contacts

Sard Verbinnen & Co.
George Sard or Paul Scarpetta, 212-687-8080

Contacts

Sard Verbinnen & Co.
George Sard or Paul Scarpetta, 212-687-8080