Investors including the Fairholme Funds and Perry Capital LLC have sued over the 2012 decision to sweep Fannie Mae and Freddie Mac profits to the government. The NMRC proposal doesn’t address what should happen to current shareholders. A federal appeals court in Washington is expected to issue a ruling on the investor lawsuit later this year.

In addition to Sperling and Parrott, other authors of the paper include Lewis Ranieri, who co-invented the mortgage-backed security, Moody’s Analytics chief economist Mark Zandi and Barry Zigas, who is director of housing policy at the Consumer Federation of America.

Their idea to raise money from investors hinges on issuing fixed-dividend securities that would only pay out when the company makes a profit. Private shareholders also would be represented on NMRC’s board, a move that the authors say would discourage the company from taking excessive risk.

Government Inefficiencies

The governance structure, which is meant to mirror that of a private company, will prevent the NMRC from being bogged down by inefficiencies that plague government agencies, Parrott said.

The arrangement could be met with skepticism from Fannie Mae and Freddie Mac investors as some shareholders have said that if the profit sweep stands, it would be more difficult to raise private capital for a future system.

“If the government’s allowed to take 100 percent of the profits forever, no one’s going to put a dollar of capital in a rescue situation and it’s going to cause people a real question whether they’re willing to put a dollar of capital into any financial institution,” Pershing Square Capital Management Founder William Ackman said last year during an event at Columbia University.

In addition to the new fixed-dividend securities, the NMRC would lay off most of the risk of mortgage defaults to private investors. A separate “mortgage insurance fund” first held at Treasury and later transferred to the NMRC would provide a final cushion, bringing the total capital standing in front of taxpayers to 8.5 percent. The authors say a buffer that size could withstand a housing downturn almost twice as severe as the last one.

‘Nothing Changed’

A potential hurdle to the NMRC proposal gaining traction in Congress is that Republicans may oppose a plan that still leaves taxpayers backing mortgages.