Senate banking leaders reach deal on Fannie, Freddie bill outline

WASHINGTON Tue Mar 11, 2014 11:59am EDT

The headquarters of mortgage lender Fannie Mae is shown in Washington September 8, 2008.REUTERS/Jason Reed

The headquarters of mortgage lender Fannie Mae is shown in Washington September 8, 2008.

Credit: Reuters/Jason Reed

WASHINGTON (Reuters) - 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 and Crapo, 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.

(Reporting By Margaret Chadbourn; Editing by Tim Ahmann and Andrea Ricci)

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Comments (3)
tmc wrote:
Single family home ownership for the middle class is being eliminated. Looking toward the future; world population, resources, etc.., perhaps that is not such a bad thing. Most of the world can’t do it and I don’t think we will be able to maintain it much longer. Maybe another twenty years.

Mar 11, 2014 10:53am EDT  --  Report as abuse
Lightpost wrote:
Exchanging one set of problems for another. Govt needs to get out of banking altogether. I worked in banking for over 15 years. When they relaxed the downpaynement requirements in the mid 90′s you could see a problem coming down the pike. Like it or not some people are just not credit worthy risk. If people want a house then let them put SOME equity into the deal ..at least 5 percent. Worked for years all over the country. In the 90′s the term redlining started appearing & banks in order to appease the folks cry discrimination started breaking the UW rules so they staying in ther good graces, as the guidelines were relaxed you started to see crap pile up on the books & then every Tom, Dick & Harry opened up a mortgage brokerage firm & really really screwed the system up. & The govt , w/o proper UW & oversight just continue to buy these junk loans, & just reinforce the mentality. You close Fannie & Freddie down & start another govt. entity for this same purpose , albeit with tighter UW rules, & how long before those rules are tampered with & UW becomes slack again & we revisit this whole mess. Govt is the most ignorant or any entity. They continue the same actions over & over & keep getting the same resutls & they can not figure out why.

Mar 11, 2014 12:44pm EDT  --  Report as abuse
FreeFannieMae wrote:
Same lame rhetoric about killing Fannie and Freddie. The Government Accountability Office, Harvard Joint Center for Housing Studies, and the Federal Housing Finance Agency concluded Fannie and Freddie were not to blame for the financial crisis. The Financial Crisis Inquiry Commission concluded they contributed to the crisis but were not the primary case. The cause of the subprime crisis was congressional policy which compromised underwriting standards, private banks seizing the opportunity to sell Fannie and Freddie junk mortgages, and new home owners with unrealistic expectations. You have your elected officials to thank for this mess dating back to the Clinton administration. Things escalated under Bush’s watch and they crashed the economy in 2008 only to seize, as of Q4 earnings announced last month, the most profitable company in the world. What you are looking at is a crime scene, not a bailout. Now they want Fannie and Freddie dead under the guise of ‘protecting the tax payer’ so they can bury the evidence piling up against them which will become clear to all in the coming weeks as Fairholme Funds was granted discovery in the lawsuit challenging their illegal profit sweep of shareholder owned companies. All I have seen thus far are proposals to restructure or eliminate this 5.3 trillion dollar enterprise and replace it with a system that does the same thing. This is a wake up call and could set a major precedence going forward. It could be Apple or Exxon next. The government has crossed the line. This issue should blur party-political lines. I can not support a democrat or republican foolish enough to compromise our housing industry and economy or participate is a gross violation of our Constitution with respect to property rights.

Mar 11, 2014 12:38am EDT  --  Report as abuse
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