The leaders of the U.S. Senate Banking Committee on Tuesday outlined plans for legislation to wind down government-owned mortgage financiers Fannie Mae and Freddie Mac that they said would continue to provide access to long-term, fixed-rate mortgages. Committee Chairman Tim Johnson, a Democrat, and Senator Mike Crapo, the panel's top Republican, announced the agreement after working for months to bridge a partisan divide with the hope of moving legislation this year. They said they were putting finishing touches on a draft bill they planned to release "in the coming days."
Fannie Mae and Freddie Mac, which own or guarantee 60 percent of all U.S. home loans, provide a steady source of mortgage funds by buying loans from lenders and packaging them into securities they sell to investors. Their central role in housing finance led the government to bail them out to the tune of $187.5 billion when they ran into trouble in the midst of the financial crisis of 2007-2009. Lawmakers from both parties want to revamp the $10 trillion mortgage market to make it less likely taxpayers will ever be put on the hook again.
Under the outline from Johnson (pictured above, left) and Crapo (pictured above, right), private interests would take the first 10 percent of any mortgage losses, before an emergency government backstop would kick in. "This agreement moves us closer to ending the five-year status quo and beginning the wind down of Fannie and Freddie, while protecting taxpayers with strong private capital," Crapo said in a statement.
The work by Johnson and Crapo builds off a bipartisan measure previously proposed by Senators Bob Corker of Tennessee and Mark Warner of Virginia. While the announcement from Johnson and Crapo marks the latest step forward, threading the needle between centrist lawmakers, liberal Democrats and conservative Republicans is still likely to prove a difficult task.
"This is another step towards reform, but we are still years away from having either the legislative capacity or market willingness to embrace a new mortgage finance system," said Isaac Boltansky, a policy analyst with Compass Point Research and Trading.
Under the proposal, Fannie Mae and Freddie Mac would be wound down and replaced with a new government reinsurer called the Federal Mortgage Insurance Corp., which would only provide assistance after private creditors had taken a hit. The entity would be financed by fees on lenders who want the government backstop. Included in the outline is a mandate that strong underwriting standards be built into the new system. It would also require a 5 percent downpayment for all but first-time buyers, although that requirement would be phased-in over time. Some consumer and housing advocates worry that a system with rigid down payments will prevent less affluent Americans from accessing credit even if a limited government role is retained.
"There is near unanimous agreement that our current housing finance system is not sustainable in the long term and reform is necessary to help strengthen and stabilize the economy," said Johnson. "This bipartisan effort will provide the market the certainty it needs, while preserving fair and affordable housing throughout the country."
The outline from the two senators said they plan to "eliminate affordable housing goals" and instead establish housing-related funds to ensure housing is available for all types of borrowers and renters. These funds would be financed through a user fee on lenders that seek FMIC backing. To ensure community banks are not squeezed out of the system, the senators said they would seek to establish a "mutual cooperative jointly owned by small lenders" to offer a cash window for eligible loans while allowing the institutions to retain mortgage servicing rights.
Any housing reform plan passed by the Democrat-controlled Senate must also make its way through the Republican-controlled House before it can be signed into law.
Fannie Mae and Freddie Mac were seized by regulators in 2008 as loan defaults drove them toward insolvency. But they have since returned to profitability and have returned $202.9 billion in dividends to taxpayers for their federal bailout.
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