A recent 13F filing by Bruce Berkowitz’s Fairholme Capital Management LLC shows he has a stake worth $1.3B in Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) and Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA), the two housing GSEs.

His holdings are valued at $134.45M for the common and $1.17B for the preferred stock of the companies, according to the filing.

Fannie Mae Freddie Mac FHFA Federal National Mortgage Assctn Fnni Me (FNMA)
Fannie Mae

Taxpayers to be repaid in full by Fannie Mae and Freddie Mac

The favorable turn in the housing market has enabled Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) to make solid profits in recent years – profits that were paid over to the U.S. Treasury as dividends. Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC)’s dividend payments to government have already surpassed the investment made by taxpayers to bail out the GSE after it was brought to its knees by the housing debacle in 2008.

Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) reported last week that it had made $84B in profits during the year 2013, and that it plans to pay the Treasury a dividend amounting $7.2B next month. That means Fannie too would be making taxpayers whole in respect of the bailout investment it received.

Unfortunately, that does not translate into freedom from government control, because as yet there is no means whereby investors can recoup their investment.

Berkowitz’ views

Berkowitz previously made successful bets on companies that were bailed out by the government following the housing crisis. His investments in American International Group Inc (NYSE:AIG) and Bank of America Corp (NYSE:BAC) proved highly successful.

His investments in Fannie and Freddie are motivated by the following comment he made in the January letter to shareholders: “Both are absolutely essential for uniquely-American, affordable mortgages. If you disagree, try getting a 30-year, sub-5% mortgage outside of the United States. In 2008, both companies agreed to U.S. conservatorship and extraordinarily harsh terms and conditions during a time of global crisis. The plan worked. Fannie and Freddie saved the day, repaid nearly every penny of cash received from the U.S. Treasury, and can look forward to resuming a prosperous future based just on the aging of assets held. However, many believe Fannie and Freddie will be victims of a government-sponsored expropriation that brings our country closer to a future conceived by George Orwell in his novel, 1984. We disagree.”

Proposal for purchase of insurance businesses from Fannie Mae and Freddie Mac

In November 2013, Fairholme proposed to the government for the purchase by private investors of the mortgage-backed securities insurance businesses of the two housing GSEs.

The proposal sought to address the government’s apprehensions regarding another crisis because of the dominant role the companies played in the overall housing mortgage insurance market.

It also sought to continue to offer Americans the long-term and fixed rate mortgages that are so valued as a part of the country’s housing infrastructure.

“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 Berkowitz. “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 was rejected.

Fair play

Fairholme has also launched litigation against the government objecting to a 2012 amendment to the original terms of the 2008 bailout of the two GSEs that made it compulsory for them to hand over all their profits to the Treasury. The original agreement called for the GSEs to only pay dividends applicable to the government’s holding of preferred stock.

“Fannie Mae and Freddie Mac are rapidly repaying the Government,” says Berkowitz. “Their success should surprise no one given the value of Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC).  Once the Government has recouped its investment, The Fairholme Fund … is owed a contractually specified, non-cumulative dividend for its investment in these companies.  As solvent, highly profitable companies, Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) should honor all outstanding obligations to their investors.”

Hedge fund Perry Capital has similarly sued the government over Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) and Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA).

Ackman in the fray too

Prominent activist investor Bill Ackman is also an investor in the two housing mortgage companies. A Wall Street Journal report says Ackman predicted at a recent investor meeting (closed to the press) that the Supreme Court would side with the plaintiffs if the pending litigation reached the court – if that happens, common shares of Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) and Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) could then reach a value of 10 to 15 times their current value.

He expressed a view that the two companies would escape liquidation in any legislative actions in the future, and would be revamped with higher capital levels and other safeguards.