The United States rejected Fairholme Capital Management's recapitalization proposal of Fannie Mae and Freddie Mac, saying the only way to revamp the home loan market is through proper housing finance reform, according to Gene Sperling, a senior adviser to the president.
Last week, Bruce Berkowitz's Fairholme said it wants to buy the mortgage-backed securities insurance businesses of Fannie and Freddie by bringing in $52 billion in new capital, in a bid to resolve the uncertain future of the mortgage financiers by freeing them from U.S. government control.
The recapitalization plan sought to raise about $34.6 billion in exchange for preferred stock, and at least $17.3 billion from preferred stockholders in a rights offering.
Any effort to recapitalize Fannie Mae and Freddie Mac, which were seized by the U.S. government during the 2008 housing crisis, would require congressional approval. The White House and Congress have shown no interest so far in plans proposed by private investors.
(Read more: Fed sends marketstapering message)
In response, Gene Sperling, Director of the National Economic Council, said in a speech on Wednesday that the administration simply cannot allow Fannie and Freddie to be recapitalized in its current corporate form.
He did not directly refer to Fairholme's proposal in his speech given at a conference in Washington D.C., according to a transcript made available to Reuters.
"The risks are simply too great that this would recreate the problems of the past. The only credible way to end the failed business model of Fannie Mae and Freddie Mac is through comprehensive housing finance reform," Sperling said.
Sperling said the way forward would be to create a new housing finance system in which private capital would play a pivotal role.
(Read more: Confused about Fed tapering? Don't be)
Fannie and Freddie, which own or guarantee about two-thirds of all U.S. home loans, were seized by the government at the height of the financial crisis as mortgage losses threatened their solvency.
Lawmakers on Capitol Hill have said they are intent on winding down the companies to ensure taxpayers will never be on the hook for big mortgage losses again.