Paulson & Co. and Blackstone Group are among investors backing a proposal that Fannie and Freddie be released from US control without legislation – a move that would deliver a windfall for shareholders
Paulson & Co. and Blackstone Group LP 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 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 respond to a 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.
Significant Headwinds
The Moelis proposal and others face significant headwinds to being implemented, said Isaac Boltansky, an analyst with Compass Point Research & Trading.
“This plan relies on more administrative movement than D.C. is currently capable of, at least in the near-term, but their proposals are now part of the reform conversation,” Boltansky said.
In the past year, other organizations including the Mortgage Bankers Association and the Independent Community Bankers of America have released proposals to overhaul the housing-finance system. Most of the plans would require legislation.
Ron Haynie, the ICBA’s senior vice president of mortgage-finance policy, said that based on what he had seen so far, much of the Moelis plan aligns closely with his group’s proposal, which also envisions the FHFA and Treasury implementing some reforms without legislation. In an email, he said that based on Moelis’s presentation he believed it would maintain community bank access to the system, while bringing in private capital in front of taxpayers.
On the other hand, MBA President David Stevens said his group doesn’t believe Moelis’s proposal would sufficiently reform the market.
“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,” Stevens said in a statement.
Current Backstop
Under the Moelis plan, 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, unlimited and paid-for by Fannie, Freddie and potential competitors.
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.
Bailout Terms
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.
Copyright Bloomberg 2017
