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Shareholders: GSE reform can happen quickly

Fannie Mae and Freddie Mac shareholders proposed a plan on Thursday that calls for the Trump Administration and the regulator of the two government-sponsored enterprises (GSEs) to do most of the heavy lifting in recapitalizing the enterprises and ending the government’s nearly decade-long conservatorship.

As outlined in a shareholder-funded white paper prepared by Moelis & Co., the government would end the profit sweeps immediately and allow the GSEs to retain earnings. Currently, the U.S. Treasury sweeps up almost all of the GSEs’ earnings.

The government also would embark on an aggressive course of raising private capital through stock issuances in 2019 and 2020. The paper notes that the nation's biggest banks, including Bank of America and Wells Fargo, successfully raised billions in capital by issuing stock after they were bailed out.


Shareholders believe the government could raise between $155 billion to $180 billion within four years, and before President Donald Trump's first term ends.

The plan also proposes that the U.S. Treasury sell off its stock in the enterprises, a move that would potentially raise between $70 billion to $90 billion for taxpayers. The government would retain all of the profits that it has recouped from the GSEs to date.

As to exiting ownership of the GSEs, shareholders have pointed to the model of the insurance giant American International Group (AIG), which also was taken over by the government after the financial crisis. The Treasury, which once owned more than 90 percent of the company, ultimately sold off its shares of AIG in public offerings in 2011 and 2012 at a profit.

“The blueprint does not envision that the government will write a check to any shareholders,” said Thane Carlson, head of restructuring for Moelis & Co. during a morning call. “In fact, our clients, who represent substantial private capital, are prepared to help the GSEs build capital.”

Carlson also called this the only practical reform plan that could end the conservatorship with private capital backstopping the housing-finance system.

“This is not an immediate recap and release,” Carlson said. “This is a prudent and strategic way to build private capital in such a way that we can protect the American taxpayer and, at the same time, sustain affordable housing.”

The shareholders envision an end system where GSEs perform the same role as today. They would purchase conventional mortgages and securitize them, guarantee the payments to investors by charging g-fees and retain mandated affordable-housing goals. The GSEs would maintain only small investment portfolios, and be strictly regulated by the Federal Housing Finance Agency (FHFA).

The plan calls for a limited government backstop, and only during a catastrophic downturn. The government would scale down the $258.1 billion line of credit that has been extended to the GSEs in the event of losses. A line of credit would be retained, however, which would provide an explicit guarantee in the event of catastrophic losses. The government would be compensated for providing the backstop through a fee. 

The recapitalization effort would be entirely initiated by the FHFA and Treasury. Under the shareholder’s plan, Congress could also make additional reforms to the enterprises as the GSEs were recapitalized. The plan envisions a rollout over a five-year period.

Mixed response from mortgage lobby

Reaction from mortgage trade groups, many of which have already released GSE reform plans this year, ran the gamut. Fannie's and Freddie’s shareholders include hedge funds and private-equity companies that bought up the stock on the cheap and stand to make enormous profits should the GSEs be released as private companies.

“This proposal is clearly self-serving and designed to confuse unsuspecting, innocent taxpayers into supporting a plan that is intended to line the pockets of hedge funds who invested in Fannie and Freddie,” said David Stevens, president of the Mortgage Bankers Association. MBA has called on Congress to re-charter the GSEs as regulated utilities, and allow for other guarantors to enter as competitors.

 “MBA has been clear that the self-interests of stock speculators and profit-seekers are not in the best interests of either the taxpayer or the housing system,” Stevens said. “The only solution to reforming Fannie and Freddie is through the legislative process.”

Other trade groups were more positive about the plan, however.

Ron Haynie, senior vice president with the Independent Community Bankers of America, said “it seems to fairly align with our thinking” on a number of points.

“Yes, its seems to be able to be done without Congress, but doesn’t prevent Congress from making any other reforms,” Haynie told Scotsman Guide News. “Given the current political climate, the more that can be done without legislation the better.”

Glen Corso, executive director for the Community Mortgage Lenders of America, said the plan doesn’t appear to bar big banks from owning significant amounts of stock in the GSEs. It also doesn't recast Fannie and Freddie as utilities, which would have regulated rates of return, as favored by small-lender trade groups. There also is no guarantee of equal pricing for all lenders with no volume discounts.

“We believe these items are absolutely essential in any proposal to reform the GSEs,” Corso said. 


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