A pair of former advisors to the Clinton and Obama administrations recently laid out plans to bring the contentious “recap and release” proposal to recapitalize the GSEs and release them from government conservatorship to reality.
Robert Shapiro, a former official in the Clinton administration and current advisor to senior members of the Obama White House, and Elaine Kamarck, a Harvard lecturer and one-time advisor to Vice President Al Gore, released “A Strategy to Promote Affordable Housing for All Americans by Recapitalizing Fannie Mae and Freddie Mac” Tuesday, a 53-page treatise that outlines four key components to the recap and release proposal.
First, the authors claim, writing off the $239 billion that Fannie Mae and Freddie Mac owe to the Treasury as repayment for bailout funds (which actually is $50 billion more than the GSEs received) under the Preferred Stock Purchase Agreements (PSPAs) would increase funding for affordable housing through the stock due under those warrants.
Second, that the Treasury could improve the value of that stock by ending its quarterly claim on profits earned by Fannie and Freddie, thereby allowing future earnings to bolster the GSEs’ capital reserves. The authors argue that these quarterly “sweeps” of the profits inhibit the GSEs’ ability to expand affordable homeownership through the Housing Trust Fund (HTF) and the Capital Magnet Fund (CMF).
Third, the authors claim that by selling new common stock, Fannie and Freddie could raise roughly $100 billion. Lastly, the authors urge the Treasury to transfer its warrants for almost 80 percent of the GSEs’ current common shares to the HTF and the CMF. This, they said, could help the agencies get to that $100 billion mark and, thereby, allow them to expand affordable housing initiatives. According to the report, such action could bring $3.2 billion a year for 20 years to the HTF, while the CMF would be enabled to distribute $1.7 billion a year to community development nonprofits.
While many, including President Obama, say the plan to recap and release is simply a ploy to make money for advocates, the authors make the case that seven years after the federal government rescued Fannie and Freddie and placed them under government conservatorship, the two enterprises have generally recovered. “Given the ability to build adequate capital reserves, they can now stand on their own,” the authors wrote. “The recapitalization strategy outlined and analyzed in this study would restore their independent operations, and on terms which would expand U.S. mortgage markets.”
The authors also noted that the plan provides the resources to “vastly expand the stock of affordable housing for all Americans, including for those households with very-low or even extremely-low incomes.”
Not everyone agrees. Last month at a Mortgage Bankers Association conference in San Diego, senior Obama housing advisor Michael Stegman said the administration will keep the reins of the GSEs in its grasp.