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Bruce Berkowitz on Fannie Mae, Freddie Mac: Mission Accomplished

Stocks in this article: FNMA FMCC FMCKJ FNMAS FNMFM

NEW YORK ( TheStreet) -- Fairholme Capital's Bruce Berkowitz believes it is time for the government to return Fannie Mae (FNMA) and Freddie Mac (FMCC) to private hands, as housing giants are back to making profits again, five years after their bailout.

In an interview with CNBC on Wednesday, the investor known for his deep-value, often contrarian, stock-picking style, said the agencies are very valuable franchises and are essential to the running of the mortgage market, as their public mission requires them to step in when private capital becomes scarce.

"There would be no middle-class housing, no cornerstone of American dream of housing, no 30-year mortgage, without Fannie and Freddie. There is no alternative," he said.

Fannie Mae and Freddie Mac were placed into government conservatorship in September 2008, a bailout that cost taxpayers $188 billion in total. Shares plummeted to pennies on the dollar upon the bailout, as investors lost hope that the agencies will ever make a profit.

But in the aftermath of the housing collapse, the agencies have tightened underwriting standards tremendously and increased guarantee fees to shore up profits. These measures, along with improving credit quality thanks to the housing recovery, has led to record profits at the companies. Fannie Mae reported a profit of $10.1 billion in the second quarter of 2013, its sixth straight quarterly profit. Freddie Mac posted a profit of $5 billion in the second quarter.

Still, Congress is now examining two proposals that call for the end of Fannie and Freddie and a new system of housing finance, where private capital plays a greater role.

But Berkowitz and other investors are now calling for a return to the old model.

"Fannie Mae and Freddie Mac have accomplished their mission. They did it. Mission Impossible accomplished," Berkowitz said. "It is time for them to be resuscitated, rehabilitated and to let equity build in these companies and prepare for the next rainy day."

Berkowitz is reopening his $8 billion Fairholme Fund, which makes focused bets on deeply undervalued stocks, to new investors.

The fund manager is among a small group of professional investors who have scooped up junior preferred shares on the theory that the government-sponsored enterprises are now in a position to repay the government, with money left over to pay dividends on junior preferreds.

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