Private capital solution to GSE reform suffers setback
Obama administration gives Fairholme idea the cold shoulder
The federal government remains committed to changing the large role the government-sponsored enterprises plays in the nation's housing finance, but so far appears to dislike private solutions offered so far.
One such plan to reform Fannie Mae and Freddie Mac received a negative reception from one Obama administration official, kicking off concerns in the mortgage industry that support for private capital in the housing finance reform package is not as solid as once predicted.
The quote in question came from Gene Sperling, who serves as director of the National Economic Council, an advisory committee to the president. His full speech shows support for GSE reform and even private capital, but a quote published by numerous news outlets, including Businessweek has Sperling giving a cold shoulder to a recent GSE reform package proposed by hedge fund Fairholme Capital Management.
Fairholme rolled out a plan to acquire the insurance businesses of Fannie Mae and Freddie Mac by buying up the units and forming two state-regulated private insurance companies.
The firm put a plan on the table to recapitalize the insurance units with $34.6 billion in capital in exchange for preferred stock in the entities.
Yet, Businessweek and other agencies quote Sperling in a recent Washington speech as saying: "The risks are simply too great that this model will recreate the problems of the past,” Sperling said. “New entrants could rightfully fear that GSEs would have an infrastructure advantage given their legacy pipeline and relationships."
The quote sparked some concerns that the administration may be deciding against the use of private capital in the future GSE model, prompting Brian Gardner, senior vice president of Washington Research at Keefe, Bruyette & Woods, to speculate that Fairholme Capital’s plan "has little chance of being accepted by the administration" and that the plan’s backers may be waiting it out in the hopes Congress and the White House give up on their own efforts to reform the system.
"However, in our view, this would be a very long-term play," Gardner said.
Gardner’s takeaway: Don’t expect private capital to take a leading role in shaping the GSEs anytime soon.
In fact, KBW writes, "We expect to see more policy events and more proposals in the future that float different ideas of returning the GSEs to private control and those ideas can positively impact the stocks. But we also expect to see comments like today’s speech from policy makers, which we see as a negative for the stocks."
Brian O’Reilly, co-founder of The Collingwood Group and a former director of automated underwriting and risk management at Fannie Mae, called the statements by Sperling disappointing.
“It was surprising and a little disheartening in the sense that the administration has been promoting the importance of private capital coming into the market as an important next step in the reform of the financial services industry,” O’Reilly said.
While O’Reilly contends he’s not sure of the scope of the administration’s pushback or concerns, he added, “You would expect if the administration were being sincere in seeing private capital coming back into the market, there would be a more thoughtful response – they would have been saying, we look forward to talking to parties interested in participating in that process."
O’Reilly noted that the housing agencies are tied to so many other parts of the market that many constituents will be involved in any reform process.
Given the desire for private capital to come back in, he says, any initiative will require investors with a unique skill sets.
“You are going to need investors who are capable and experienced in finding value in different places," he explained.
While reports have Sperling pushing back against the Fairholme proposal, he did note that the administration is committed to getting private capital involved in taking on some of the risk, but he did not specify how or when, which is the point of confusion for the market.
“First, we must bring back private capital to housing finance," Sperling said in his speech. "This requires making sure we have a housing finance system that is market-based and allows for real competition. Private capital and new entrants will only come back if they are certain the system is not rigged, where some competitors have an unfair advantage."