WASHINGTON House Republicans on Thursday unveiled draft legislation that would wind down housing finance companies Fannie Mae and Freddie Mac over a five-year period and sharply reduce the government's role in the mortgage market.
The sweeping proposal aims to establish a new framework for the housing finance system, a group of Republicans on the House of Representatives Financial Services Committee told reporters. The bill would also revamp the Federal Housing Administration, partly by increasing the down payments on FHA-backed loans and limiting the pool of eligible buyers.
"We have to take a holistic approach," the panel's chairman, Texas Republican Jeb Hensarling, told reporters. He said his goal is to limit taxpayer risk and replace the current system, where "the federal government has almost a virtual monopoly."
Fannie Mae and Freddie Mac, which own or guarantee about half of all new U.S. home loans, were seized by the government in 2008 as souring loans pushed them to the brink of collapse.
The companies buy mortgages from lenders and repackage them into securities for investors, which they issue with a guarantee. They were propped up with $187.5 billion in taxpayer funds, but have since returned to profitability and have paid taxpayers about $132 billion in dividends.
The new proposal would replace the companies with a non-profit, utility-like platform that investors would use to securitize mortgages without a government guarantee, essentially replacing the business model that has been a staple of the 30-year fixed rate mortgage.
The draft bill is an opening gambit in a fight with Democrats over the future of the nation's $10 trillion mortgage market that will likely be waged for years.
Republicans, who control the House, blame Fannie Mae and Freddie for helping to inflate the housing bubble, and they are eager to reduce the government's involvement and make sure taxpayers are never again on the hook for losses.
Democrats, who lead the Senate, agree Fannie Mae and Freddie Mac should be shuttered, but they want to maintain some sort of government backstop for the mortgage market.
Representative Maxine Waters, the top Democrat on the House committee, said the proposed bill was "little more than an attempt to reinvent America's housing finance system using the same kind of right-wing ideology that has eroded America's middle class for decades."
Jaret Seiberg, a senior policy analyst at Guggenheim Securities, said removing the government guarantee would drive mortgage costs higher and lock some potential buyers out of the market.
"The odds are very much against this bill becoming law. Not only is the housing lobby influential, but voters care about their ability to get mortgages and purchase homes," he said.
Last month, a bipartisan group of lawmakers in the Senate introduced a bill that would abolish Fannie and Freddie within five years and replace them with a new "public guarantor." The bill would still maintain a federal role in the market.
Waters said the approach of House Republicans "made it clear" that bipartisan housing reform was not their priority.
FHA DOWN PAYMENTS WOULD RISE
In addition to the new securitization platform, the Republican measure would create a legislative framework and regulatory structure for so-called covered bonds, which would be backed by mortgages but would remain on the issuer's balance sheet, unlike the mortgage-backed securities issued by Fannie Mae and Freddie Mac.
The lawmakers also included language to repeal a requirement under the Dodd-Frank Wall Street reform law, known as the "qualified residential mortgage" rule, that will require loan originators to retain some of the risk of their lending.
The proposal would also delay the implementation of the so-called qualified mortgage rule, which requires lenders to verify borrowers' ability to repay their loans and offers legal shields for lenders who follow certain guidelines.
It would also take several steps to reform the Federal Housing Administration. The FHA, which insures about a third of all U.S. mortgages, has faced mounting losses from defaults on mortgages it guaranteed from 2007-09 as the housing bubble deflated. It may soon exhaust its cash reserves.
The bill, which the lawmakers plan to move through their committee before an August recess, would increase down payment requirements for FHA loans from the current 3.5 percent minimum up to 5 percent for certain borrowers.
The FHA does not make loans itself, but offers private lenders guarantees against homeowner default.
Only first-time buyers and moderate-income borrowers would be eligible for FHA-backed loans under the bill.
Hensarling is shepherding the bill, which is cosponsored by Representatives Scott Garrett of New Jersey, Randy Neugebauer of Texas and Shelley Moore Capito of West Virginia.