Bankers at odds over GSE recapitalization proposal

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WASHINGTON — A new proposal to recapitalize Fannie Mae and Freddie Mac so the two housing enterprises can exit conservatorship is dividing the banking industry.

The Independent Community Bankers of America supports the plan developed by the investment banking firm Moelis & Co. LLC that would recapitalize the two government-sponsored enterprises within four years. Unlike most other housing reform proposals, it would not require legislation.

"We are aligned with the Moelis proposal because it provides the GSEs with capital and there is a process for that under the current law," Ron Haynie, senior vice president of mortgage policy with the ICBA, said in an interview.

But the American Bankers Association and Mortgage Bankers Association have raised objections to the "Blueprint for Restoring Safety and Soundness to the GSEs" prepared by the New York investment bank. They note that the firm that created the plan acts as financial advisers to some shareholders of Fannie and Freddie stock, who would stand to benefit substantially if the proposal was enacted.

“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, the MBA's president and CEO. "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. The only solution to reforming Fannie and Freddie is through the legislative process.”

So far, the Treasury Department has recouped the $187.5 billion it employed to rescue and prop up the two GSEs. In addition, the Treasury has pocketed $87.3 billion in GSE profits as the department continues to sweep Fannie and Freddie's profits into its coffers each quarter.

Federal Housing Finance Agency Director Mel Watt recently told Congress that the GSEs are profitable but that their inability to rebuild capital is creating "serious risk."

The Moelis plan calls for the FHFA and the Treasury to stop the profit sweeps voluntarily and to stop waiting for Congress to pass GSE reform legislation.

"Beginning to build private capital now, instead of waiting for legislation that may not be enacted before Treasury has to advance additional funds to the GSEs, is absolutely necessary to maintain the integrity of the secondary mortgage market," the Moelis blueprint says.

But the ABA is concerned the Moelis plan will benefit investors and leave Fannie and Freddie with too little capital.

"There is too much public risk and private gain in this proposal. I think it will have objections from a lot of quarters, including Congress and the Treasury," Bob Davis, a senior vice president of the group, said in an interview Monday.

The ICBA, however, is backing the Moelis blueprint. It will allow Fannie and Freddie to raise capital through retained earnings and through several public offerings.

"It creates a system with capital behind it that is financially sound," Haynie said.

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Housing finance reform Mortgages Law and regulation Fannie Mae Freddie Mac FHFA