Ackman Loses – Fannie/Freddie Win! Not…

Bill Ackman of Pershing Square Capital looks like he lost a small battle. He was in a fight to take over NY’s Stuy Town. The property was foreclosed on today, so Bill lost out. But, as is usual, he came out a winner. Fannie Mae and Freddie Mac were on the other side of this. So you might say they won. I think they just made a mistake they will regret.

Stuy Town was bought in 06 for $5.4b. The cash flow never covered interest. So when the reserve ran out the deal cratered. The transaction was financed with a $3b first mortgage. The balance of debt was subordinated junk and worthless equity. Fannie and Freddie bought a total of $1.5b of the mortgage. The other half was picked up by Wachovia. The Wachovia interest was put in a mega ($7b) CDO .

The Wachovia piece has been scattered to the wind. That puts Fannie and Freddie in complete control. CW Capital is the servicer, but one can assume that nothing happens without F/F signing off on it.

Ackman got into the story by buying a piece of the sub debt. He paid $45mm for a $200mm chunk and tried hard to use his position to muscle his way into controlling the property for little money down. He has been fighting this in the courts and delaying the foreclosure for months. I have no connection to this deal but it might have sounded like this:

Ackman to F/F/CW:

"My lawyers have bigger balls than yours do. We will paper you to death. You want me to take a walk?  Pay me the $45mm I’ve got in the deal."

This from Reuters:

Under the settlement, an entity created by CWCapital will buy back the loans for the $45 million the joint venture between Ackman's Pershing Square Capital and Winthrop Realty Trust paid for them, Winthrop said in a statement.

Okay, Bill is out, money good. And Fannie and Freddie are sitting on a loser. This discussion of the Stuy Town value comes from the FHFA. Fitch had valued Stuy Town at only $1.8b I asked FHFA about it:

FHFA:This is Fitch’s estimate. Other firms estimates place the values between $1.6 and $2.2 billion depending on the cap rate.

The first mortgage is at $3.6b and there is accrued and unpaid interest piling up. The assets don’t cover the principal. But the worst news is that our pals at Fannie and Freddie are about to become one of the biggest landlords in all of NYC. This is a 60 year old property on 80 acres with 11,250 apartments. It is hard to even conceive of the cost of maintenance and infrastructure improvements. Keep in mind that this in Manhattan.

If you follow the ownership responsibility for Stuy Town it goes straight to the Treasury Department as they are the administrators of the zombies called Fannie and Freddie. A letter to the T.Sec might read:

Dear Mr. Geithner,

I am writing to you as you are responsible for Stuy Town now that you own it. So here are some of my problems:

-The water tastes bad and the pipes are leaking. The electric is faulty and dangerous.
-The washing machines are always broken. The coin changer keeps getting robbed.
-My windows all leak air. The heat never works. The lights are out in the hall.
-The sidewalks are all broken. There is graffiti everywhere. Our playgrounds are in disrepair.
-I think I saw a rat near the garbage bins.

Please help me with these problems. Thanks in advance!

New York City Councilman Dan Garodnick
(represents Stuyvesant Town and Peter Cooper Village and lives at Stuy Town)

I am sort of joking about the citizens of Stuy Town directing their complaints to poor Tim Geithner. But in another way I am not. Fannie Freddie and Treasury will rue the day they took control. The New Yorkers will just eat them alive.