Paulson Co. and Blackstone Group are among investors backing a proposal that Fannie Mae and Freddie Mac be recapitalized and released from U.S. control without legislation. Taxpayers would receive as much as $100 billion, according to the plan, which could also deliver a windfall for shareholders.
The blueprint released Thursday was developed by investment bank Moelis Co. in its capacity as a financial adviser to Paulson Co., Blackstone GSO Capital Partners and other investors, according to people familiar with the matter. The plan would let Fannie and Freddie build capital before the government sells its stakes in the mortgage-finance giants.
Representatives for Paulson Co. and Blackstone didn’t immediately return messages seeking comment, while a Moelis spokeswoman declined to comment.
Paulson, Blackstone and the other investors are the latest voices in the renewed debate over the fates of Fannie and Freddie, which have remained critical backstops for the U.S. mortgage market while under government control. Treasury Secretary Steven Mnuchin has said dealing with the companies will be a Trump administration focus in the second half of this year.
Both John Paulson and Blackstone Chief Executive Officer Stephen Schwarzman have acted as economic advisers to President Donald Trump.
The Moelis plan envisions building between $155 billion and $180 billion in capital, through allowing the companies to retain earnings, letting current shareholders contribute new money and raising more through the capital markets. It would also have the government substantially reduce the remaining balance of its outstanding preferred shares.
The proposal could be impossible to implement in the near-term without the support of the U.S. Treasury Department and the Federal Housing Finance Agency, which controls the companies. Megan Moore, an FHFA spokeswoman, said Thursday that the agency continues to believe that Congress must address housing-finance reform and that FHFA Director Mel Watt won’t consider recapitalizing and releasing the companies. Watt’s term ends in 2019, at which point Trump can appoint a successor.
Mnuchin told the Senate Banking Committee last month that it was his “strong preference” to work with Congress to develop a bipartisan housing-finance overhaul, though he hasn’t ruled out administratively reforming Fannie and Freddie. A Treasury spokeswoman didn’t immediately respond to request for comment.
According to Moelis, the plan would protect taxpayers while essentially having the secondary mortgage market work the way it does now. That would include the preservation of affordable housing mandates, one of the issues that has tanked previous reform efforts amid disagreements between Republicans who want to kill them and Democrats who believe they’re essential to helping low-income borrowers get loans.
The government’s backstop of the mortgage market would be limited to the current level, but would fall somewhat as private capital is raised. Some stakeholders in the housing market, lawmakers and other advocates have argued that the government backstop should become explicit and unlimited.
Fannie and Freddie don’t make loans themselves, but buy them from lenders, wrap them into securities and make guarantees to investors in case of default. The companies got $187.5 billion in bailout money after they were taken over during the financial crisis. In return, the U.S. Treasury got a new class of “senior” preferred shares that initially paid a 10 percent dividend, along with warrants to acquire nearly 80 percent of the companies’ common shares.
In 2012, the government changed the bailout terms, taking nearly all the companies’ profits and nothing in times of losses. Since the bailout, the companies have paid taxpayers about $266 billion. The Treasury has committed to provide the companies with as much as $258 billion in additional bailout funds if needed.
Fannie and Freddie shareholders have fought for years to preserve value in billions of common and preferred stock issued before the crisis. Some shareholders beginning in 2013 sued the government, challenging the change in bailout terms, but judges have dismissed many of those suits. Other shareholders, including Paulson, have embarked on an intense lobbying and public relations campaign to persuade policy makers to free the companies.
According to Moelis, shareholders suing the government didn’t participate in its plan.
The involvement of Paulson and Blackstone was reported earlier by Axios, which cited an interview with the billionaire hedge fund manager.