RealMoney

The latest proposal on what to do with Fannie Mae (FNMA) and Freddie Mac (FMCC) was recently released, but it omitted one key aspect of the equation: shareholders.

The report on government-sponsored entity (GSE) reform was written by a team of writers who suggested merging Fannie and Freddie into a single government corporation, called the National Mortgage Reinsurance Corp. (NMRC), which would perform the same functions the two perform today. There also would be an explicit government guarantee on mortgage-backed securities funded by "guarantee fees" charged by NMRC. Also, all "noncatastrophic credit risk" would be pushed into the private market.

As for what would happen to current Fannie and Freddie shareholders, the authors admit the new model so far has not figured out how to address them.

Fannie and Freddie have been under conservatorship since 2008. At the time, the government received warrants to acquire nearly 80% of the companies' common stock and also acquired senior preferred shares, which paid a 10% dividend. In 2012, the terms of the agreement were changed. Instead of paying a 10% dividend, Fannie and Freddie were required to pay nearly all of their profits to the U.S. Treasury, in what has been called the "net worth sweep."

Since then, several investors in Fannie and Freddie, including Fairholme Funds and Bill Ackman's Pershing Square, have filed lawsuits against the government for the expropriation of investor property.

It is not yet clear whether investors would receive anything if this proposal was adopted.

"What [investors] want to know is, what do they get, will they be completely wiped out or is there some residual amount of money -- similar to the AIG deal -- that would allow them to walk with some money for what they own," Richard Bove of Rafferty Capital Markets said in a phone interview with Real Money. "This proposal doesn't mention it at all."

Bove also mentioned that private markets may have some hesitancy investing in NMRC, given how Fannie and Freddie shareholders have been recently treated.

There have been several recommendations on how to reform Fannie and Freddie -- especially on Twitter -- however, few of the suggestions come from a team with as much clout as the authors of last week's paper. Perhaps that is why the omission of what would happen to existing shareholders is so glaring.

The proposal was written by: Jim Parrott, a former senior advisor on the National Economic Council; Lewis Ranieri, who has been considered the "father of the securitized mortgage market"; Gene Sparling, former director of the National Economic Council; Mark Zandi, chief economist of Moody's Analytics; and Barry Zigas, director of housing policy at Consumer Federation of America.

While the paper may offer a path for how GSEs can operate in the future, the past must still be dealt with.