The White House and Senate leaders have agreed on a proposal for winding down mortgage giants Fannie Mae and Freddie Mac almost six years after the federal government bailed out the two firms, The Wall Street Journal reported March 11.
The bipartisan proposal would overhaul the country’s $10 trillion mortgage market just as the two government-sponsored enterprises have started generating substantial profits for the U.S. Department of the Treasury.
Senate Banking Committee leaders Tim Johnson, D-S.D., and Mike Crapo, R-Idaho, drafted the proposal, which calls for replacing Fannie and Freddie with a new system of federally insured mortgage securities where private insurers would have to take initial losses before triggering a government guarantee.
However, the bill would permit private entities to purchase an explicit government guarantee to cover catastrophic losses, creating a framework similar to how the Federal Deposit Insurance Corporation regulates banks. The bill also includes a provision for federal insurance to cover loans with down payments as little as 3.5 to 5 percent as well as to maintain current loan limits up to $625,000 in high-cost markets, the Journal reported.
Although the White House approves of the proposed legislation, the agreement still has to elicit Senate and House approval. Nevertheless, the Journal noted that the proposal was the most concrete step so far to resolve the last major piece of unfinished business from the 2008 financial collapse.
While Banking Committee Democrats and Republicans agree on the bill, Senate approval isn’t a given. Things are even more uncertain in the House. Many Republican lawmakers are adamantly against the federal government providing any kind of government backstop for the mortgage market.
Johnson and Crapo anticipate releasing a full draft of the bill very shortly and will hold a committee vote in the next few weeks. The White House, which has collaborated on the bill, called the proposal “the biggest remaining piece of post-recession financial reform,” the Journal reported.
Since taken into conservatorship in 2008, Fannie and Freddie have returned $185 billion to the Treasury in the form of dividend payments.
However, Crapo remarked that the fact the two GSEs back nearly three in five new home loans is “unacceptable.” He told the Journal this latest proposal “provides a balance between providing broad access to mortgages while protecting taxpayers from losses." Crapo’s and Johnson’s bill is based on one presented last year by Sens. Bob Corker, R-Tenn., and Mark Warner, D-Va.
The Journal noted that it remains unclear how hedge funds and other institutional investors holding the GSEs’ preferred stock will be treated under the proposed bill. Already, some firms have filed lawsuits to challenge the government’s decision requiring Fannie and Freddie to pay all profits back to the Treasury.
It remains to be seen if the Senate committee can garner support from enough liberal Democrats and harder line Republicans to pass the bill. The House has so far been unable to move any GSE reform bills to a full House vote.
Housing industry groups remain adamant that a government backstop of some kind is necessary to maintain broad access to credit, particularly the 30-year, fixed-rate mortgage.