The Case for Change

A year following the release of the Safety and Soundness Blueprint by Moelis & Company LLC in June 2017, the company has released an update. Moelis developed the Blueprint as financial advisors to certain non-litigating preferred stockholders of Fannie Mae and Freddie Mac. Key updates include a call for several actions within the next four years, such as earnings retention, issuance of new GSE common and preferred stock into the capital markets, and secondary offerings of Treasury’s holdings of nearly 80 percent of common stock in the GSEs.

“The Safety and Soundness Blueprint ensures that homeownership for middle-class and working-class Americans remain available and affordable,” the update reads. “The fixed rate pre-payable 30-year mortgage would remain the bedrock of U.S. housing finance.”

This update comes at the same time as the 10 year anniversary of the conservatorship of Fannie Mae and Freddie Mac. Developments at the GSEs since the original release in 2017 include an increase in the indicative valuation of the Treasury Department’s warrants. Moelis cites lower tax rates from the Tax Cuts and Job Acts of 2017 as well as improved credit performance from Fannie and Freddie as reasons for the increase.

Additionally, Fannie Mae and Freddie Mac have now completely repaid the federal government, and returns are currently exceeding the 10 percent annualized rate of return established at the beginning of conservatorship. With the government repaid, it may be close to time to end conservatorship, as the FHFA has also developed and released its newest post-conservatorship regulatory capital framework for Fannie and Freddie.

Said Moelis in a release: ““The original Safety and Soundness Blueprint laid out the means and process by which to rebuild capital at Fannie and Freddie as shareholder‐owned single‐purpose insurers, refocused on their core conventional mortgage guarantee business, de-levered, and held to the highest regulatory and capital standards. One year later, on the 10 year anniversary of Fannie and Freddie being placed in conservatorship, the Safety and Soundness Blueprint continues to provide the only mathematically credible, detailed, and achievable path forward for the GSEs.”

Find the full Blueprint for Restoring Safety and Soundness to the GSEs: One Year Later update here.