Hedge Funds Get Lift on House Bill to Free Fannie, Freddie

  • Mortgage giants would be released after 5% capital cushions
  • Bill calls for $1 billion put annually in housing trust fund

Hedge funds seeking to cash in on their shares of Fannie Mae and Freddie Mac may get a boost from U.S. Representative Mick Mulvaney.

The South Carolina Republican is planning to propose legislation by the end of the year that would consider the mortgage giants’ debt to be repaid and release them from conservatorship after they build up capital cushions of 5 percent, according to three people familiar with the bill who asked not to be identified because the details aren’t public. The bill would face a high hurdle to getting passed since it probably won’t receive enough support in the House.

The companies may be required to put $1 billion apiece annually in the low-income housing fund, the people said. That’s in an effort to try to win bipartisan support, such as from Keith Ellison, a Minnesota Democrat.

Ellison said in a Twitter post Thursday that he isn’t a current supporter of the Mulvaney bill. Brett Morrow, a spokesman for Ellison, declined to comment for this story.

Fannie Mae and Freddie Mac investors such as hedge fund manager Bill Ackman of Pershing Square Capital Management and Bruce Berkowitz of Fairholme Capital Management are challenging an arrangement in which the Treasury Department takes all of the entities’ profits above a minimum net worth threshold. If the mortgage giants were released under the Mulvaney bill, investors could finally share in the companies’ profits.

The mortgage companies have operated under federal conservatorship since they were seized during the financial crisis in 2008. The payments to Treasury aren’t counted as a repayment for the bailout, but as a return on the U.S. investment, leaving Fannie Mae and Freddie Mac with no way out of government control.

Capital Cushions

“What we’re looking to do is try to figure out a way to get Fannie and Freddie to build up some type of cushion to protect the taxpayer for so long as it exists,” Mulvaney said in an interview.

After the 5 percent capital cushion is reached, Fannie Mae and Freddie Mac would have to maintain a buffer of 10 percent, the people said. Mulvaney declined to comment on the specifics of his legislation.

White House adviser Michael Stegman last month dismissed investor calls to release Fannie Mae and Freddie Mac. He said he’s sticking to keeping the government sponsored enterprises under U.S. control and doesn’t see a path to releasing them anytime soon since housing-finance reform won’t be happening in the near future.

Senator Bob Corker, a Tennessee Republican, along with Senator Mark Warner, a Virginia Democrat, previously tried to pass housing legislation to replace the finance companies with a government re-insurer. Their effort was stalled in 2014 after failing to receive a Senate floor vote. End-of-year spending legislation being considered in the Senate includes Corker’s plan that would block investors from receiving a payout for their shares from the Treasury until Congress approves a housing-finance overhaul.

“There is no interest whatsoever on Capitol Hill to address comprehensive GSE reform which suggests that status quo will hold for the foreseeable future,” Isaac Boltansky, an analyst in Washington with Compass Point Research & Trading, said in an e-mail. “With each passing day though, the appetite for winding down the GSEs lessens, which suggests that the policy conversation will continue to shift toward a consideration of reforming and releasing the GSEs.”

(An earlier version of this story was corrected to remove reference to Ellison supporting the legislation.)

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