Fannie (FNMA) and Freddie’s regulator and conservator, the Federal Housing Finance Agency (FHFA), believes we will soon see administrative resolutions of remaining issues to end, what we believe to be, federal conservatorships of two of the most successful companies in the world.
We have argued for years that had the FHFA’s questionable net worth sweep never been implemented, Fannie and Freddie would have predictably restored statutory capital levels for safety and soundness, housing markets would better meet affordability goals, and Fannie and Freddie preferred shares would be fairly priced. Parts of the judicial system also appear to be moving towards our view with Judge Willett’s belief that the conservator’s “net worth sweep strips the GSEs of their capital reserves, and it is thus antithetical to the FHFA’s statutory command that it ‘preserve and conserve the assets and property’ of the GSEs.2” A conservator cannot “bleed the GSEs profits in perpetuity.3”
Despite the over 35% rise year-to-date, the preferred shares continue to trade at what we believe are large discounts to redemption values and realistic future outcomes.
From Bruce Berkowitz (Trades, Portfolio)'s Fairholme Capital Management fourth-quarter 2018 shareholder letter.
