From the point they took a significant ownership position in Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC), snatching up more than 150 million common and preferred shares, Fairholme Capital Management has been excessively vocal in talking up their position to encourage the US government to loosen up the reins.

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

Opaque process

“It sounds like the administration has been having some private conversations with members of Congress, but we have yet to understand where that’s heading…The process has been very opaque,” said Dan Schmerin, investment research director at Fairholme, in an interview with MarketWatch.  The future remains clouded and government officials and Congress don’t appear to have a clear plan, shareholders say.

Five years ago, in the wake of the 2008 financial crisis, Fannie and Freddie were placed into a government conservatorship after a federal bailout.  Then in 2012 the government unilaterally amended its bailout agreement that forced the mortgage finance companies to send all their profits to the US Treasury Department, a point which Fairholme has sued the government over. As Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) are set to repay all their bailout funds, calls for the government to set the now highly profitable enterprises free are growing and the attacks are getting personal.

“With each next step we have more unanswered questions than anything else,” Schmerin said. “If I learned one thing from my time in Washington (I spent eight years there), it’s really not the initial action that causes as much consternation and upheaval as the potential cover up.”  Many of the personal attacks have been targeted at government officials public misstatements on the topic and then efforts to obfuscate facts, an issue we outlined in a previous ValueWalk article.

Strategy unclear

“It’s not entirely clear to us what the administration’s plan or strategy is with respect to reforming the GSEs (Government Sponsored Enterprises such as Fanny and Freddie),” Schmerin said. “Aside from publishing a white paper in 2011, their thoughts, recommendations and viewpoints on GSE reform have really been few and far between. The president recently articulated, as you know, a few very high-level guiding principles, which are subject to significant interpretation and also subject to immediate disagreement from leaders within his own party,” he said, noting the confusion.

What role should government play in US housing finance?

How Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) operate in the future is in part dependent on U.S. lawmakers agreeing over the role that the government should play in the U.S. financing housing. “There is a growing recognition of the vital role that Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) play in our secondary mortgage market and the tremendous difficulties that our nation would face if one were to effectively abolish Fannie and Freddie with the hope of rebuilding other firms or a consortium of others firms to try and fill the void,” he said.

As rates likely set to rise, eliminate the thirty year fixed mortgage?

With long-term interest rates at all time lows and likely headed higher, Schmerin  was asked if a guaranteed 30 year mortgage were needed, a key role for Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC).  “An overwhelming majority of Americans demand the 30-year fixed rate. An overwhelming majority of Americans want the financial certainty that comes with fixed-rate payments and slow amortization over the lifetime of that mortgage.”

Will Fairholme throw in the towel and sell its stake in Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) if the government fails to take action? “I don’t think that’s been contemplated,” he said.  Get ready for a prolonged battle.