The Net Worth Sweep, or the sweeping of all Fannie Mae and Freddie Mac profits into Treasury, has been under more intense scrutiny as of late since some of the documents related to Fairholme Funds’ lawsuit against the government over the Net Worth Sweep were unsealed in April.
The recently unsealed documents suggest that key government officials, namely Fannie Mae’s CFO, may have known that the GSEs were on the verge of huge profitability when the bailout agreement was amended in August 2012 to start the Net Worth Sweep.
As a preferred stockholder in the GSEs and one of the Enterprises' largest investors, Fairholme has one of 22 current lawsuits against the government that involves the Net Worth Sweep.
“We have made enormous progress over the last 12 months, largely behind the scenes,” Fairholme CEO Bruce Berkowitz said in a recent interview. “With each passing day, we seem to be getting closer to the finish line, so I remain very optimistic.”
Add to that the fact that the GSEs’ capital buffer is being reduced by $600 million per year until it reaches zero by January 1, 2018, as well as the fact that Freddie Mac has suffered a loss in two of the last three quarters, and many stakeholders in the mortgage industry, as well as GSE investors and shareholders such as Fairholme, are deeply concerned about the possibility of another taxpayer-funded bailout.
“Fannie and Freddie have over $5 trillion of liabilities outstanding, yet Treasury is milking them of all their income and forcing them to operate with no capital,” Berkowitz said. “It’s absurd. If the government takes all of your wealth every quarter as the return on a forced investment, and never allows the repayment of that forced investment, then it is inevitable that there will come a time in the future when the government will force more investment on you, another so-called bailout.”
To be clear, Berkowitz does not want to get rid of Fannie Mae and Freddie Mac; after all, he said, “Who else makes the 30-year pre-payable fixed-rate mortgage widely available through thick and thin? Who else can provide $7 trillion of liquidity to America’s housing market since 2009 helping low and moderate-income Americans buy, rent, or refinance a home?”
Berkowitz simply wants the GSEs released from government control, “the same as AIG.” He added, “I believe the United States Treasury is growing increasingly isolated as a result of its eight-year policy forcing Fannie and Freddie to remain in a state of captivity known as 'conservatorship.' It is a shame and a huge delay of game.”
Fannie Mae and Freddie Mac are two of the largest companies in the world, he said, and they are not going away, as evidenced by Freddie Mac hiring hundreds of new employees and Fannie Mae moving into a new million square foot office in Washington, D.C.
“It is still hard to believe that some in Washington want to eliminate them in the hope of finding something better, or at least finding something that caters better to their special interests and crony capitalists,” Berkowitz said.