Firm advising GSE investors updates plan to end conservatorships

WASHINGTON — An investment banking firm has released an updated proposal for recapitalizing Fannie Mae and Freddie Mac designed to allow the mortgage giants to exit conservatorship.

The revised blueprint by Moelis & Co. LLC, which serves as a financial adviser to some Fannie and Freddie shareholders, incorporates a plan by the mortgage companies' regulator for them to adopt risk-based capital requirements. The original Moelis plan released in June 2017 had drawn mixed reviews from the industry.

Like the original Moelis document, the new update calls for recapitalizing the government-sponsored enterprises in the next four years and issuing new GSE common and preferred stock into the capital markets. Unlike most housing finance reform proposals, the Moelis proposal would not require legislation.

But the updated blueprint released Friday incorporates the Federal Housing Finance Agency’s post-conservatorship regulatory capital framework for the GSEs, which is currently in the rulemaking stages. In compliance with the FHFA proposal, the Moelis blueprint calls for a “payment of an ongoing market-based commitment fee” to the Treasury Department for its explicit guarantee.

“One year after its release, the Safety and Soundness Blueprint continues to provide the only mathematically credible, detailed, and achievable path forward for the GSEs,” the new blueprint reads. “It relies on existing infrastructure, as opposed to new and untested systems, to ensure stability and liquidity in the mortgage markets.”

The newest version of the proposal also emphasizes that Fannie and Freddie have now completely repaid the federal government, exceeding the original 10% rate of return put in place at the beginning of the GSEs' conservatorships.

However, it is unclear if the update addresses lingering concerns among banks and other lenders about the plan. Both the American Bankers Association and Mortgage Bankers Association came out against the original plan. They argued that it was self-serving since Moelis is assocated with GSE investors who stand to gain if the two companies are released from conservatorship, that it would leave the GSEs with too little capital, and that ultimately Congress should enact GSE reform.

But the Independent Community Bankers of America supported the Moelis proposal, saying it would create a financially sound system with ample capital.

MBA said Friday it welcomes the updated proposal and agrees with some of its points, but ultimately believes that GSE reform should come before recapitalization.

“We also believe that a legislative solution is needed to achieve the explicit government guarantee at the security level,” said Bob Broeksmit, MBA president and CEO.