A closely watched proposal to replace Fannie Mae and Freddie Mac would require raising more than $100 billion from private investors, according to its authors who include advisers to Hillary Clinton.

Left unstated is how to deal with current shareholders, who include hedge funds and money managers who are locked in a bitter legal battle with the government over profits generated by the mortgage-finance giants.

At issue is a paper that advises Congress to wind down Fannie Mae and Freddie Mac and replace them with a government-owned company dubbed the National Mortgage Reinsurance Corporation. While the authors first proposed the new company in March, they provided details Tuesday on how it would be governed and capitalized.

Notably, NMRC would create a new class of securities paying a fixed dividend to erect a buffer against possible downturns. As the company ramped up, the securities would build capital amounting to 2.5 percent of the company’s guarantees -- or about $125 billion, assuming that the firm backed about $5 trillion of mortgages.

The proposal could be a starting point for housing-finance reform if presumptive Democratic nominee Clinton is elected president. Two of the papers’ authors, former White House officials Gene Sperling and Jim Parrott, have advised her campaign on housing policy.

“We wanted to take part of a system that works and put it on a foundation that’s sustainable,” Parrott, who has no formal ties to the Clinton campaign and is a former top housing adviser in the Obama White House and current consultant for financial firms, said in an interview.

Fannie Mae and Freddie Mac don’t make mortgages. They buy them from lenders, wrap them into securities and provide guarantees to investors in case of default. That process is the backbone of America’s mortgage market, making some wary of replacing it with an untested system.

Eight years after the financial crisis, the companies’ fate is still undecided and likely to be passed from President Barack Obama to the next administration. The government took them over in 2008, eventually providing a $187.5 billion bailout.

Investor Lawsuits

Since then, Fannie Mae and Freddie Mac have become profitable, but the current terms of their bailout require them to send nearly all earnings to the U.S. Treasury. The companies rely almost wholly on about $258 billion in remaining credit from Treasury in case of losses.