Fairholme sets clock on Fannie and Freddie deal A private sector takeover of the core businesses of Fannie Mae and Freddie Mac may only be possible if regulators and the US Treasury move fast to pursue a deal for the housing finance giants, according to Fairholme Capital Management, the hedge fund leading the investor group behind the proposal. In a letter to Edward DeMarco, Federal Housing Finance Agency acting director, designed to spur the Obama administration into action, Fairholme's founder Bruce Berkowitz claimed support from "a critical mass" of holders of Fannie and Freddie's preferred shares. But he warned the plan could be abandoned as soon as the first quarter of 2014. The investor group's aim is to pressure the administration into taking a lead on reform of US housing finance and the future of Fannie and Freddie, instead of waiting for consensus on Capitol Hill. Fairholme and other investors in the two companies" preferred shares are trying to persuade the government to restore value to their holdings, which were wiped out under the terms of the federal conservatorship of Fannie and Freddie. Other hedge fund holders include Claren Road Asset Management, Blackstone's GSO arm, Paulson & Co and Perry Capital. Several, including Fairholme, have already launched lawsuits against the Treasury. "Time is of the essence for two reasons," Mr Berkowitz wrote. First, the value of the insurance businesses is deteriorating while they are operated as federal wards . . . Second, the date on which Fannie and Freddie will have fully repaid the US Treasury is rapidly approaching. It may be more difficult to induce preferred shareholders to accept restricted capital, which under the proposal is locked into the new insurers for at least five years, once the US Treasury has been fully repaid. Under revised bailout terms, Fannie and Freddie cannot repay their debt to the Treasury, which takes all their profits in the form of dividends. The Financial Times revealed on Wednesday that the shareholders are proposing to set up two new, private-sector insurance companies to take over the work of guaranteeing US mortgage-backed securities, by turning their preferred shares into $34.6bn of equity in the new companies and conducting a $17.3bn rights issue. Capitalised at more than $50bn, the two insurers could guarantee $1tn of US mortgages, proponents claim. Treasury officials and staffers involved in housing reform on Capitol Hill have expressed scepticism over the idea, however. Fannie and Freddie have been under the wing of the government since being bailed out in 2008, and politicians have vowed to wind them down. The two companies and other government agencies now guarantee 85 per cent of all mortgages in the country, and Congress has begun examining ways to reduce the federal footprint in the housing market. But any reform proposal probably will not move forward in Congress until well into next year at the earliest. The Treasury has left Congress to take the lead, while the FHFA has been slimming down Fannie and Freddie's historic mortgage portfolio and raising guarantee fees nearer to assumed private market levels. The FHFA and Treasury declined to comment.