Fannie, Freddie bill leaves status of private shareholders to courts

Sun Mar 16, 2014 5:04pm EDT

* Duo would continue to pay all profits to U.S. under bill

* Bill aims to wind down companies within five years

* Unclear how much support Johnson-Crapo bill will receive

* Final revamp of housing finance system could take years

By Margaret Chadbourn

WASHINGTON, March 16 (Reuters) - A draft bill to wind down government-run mortgage financiers Fannie Mae and Freddie Mac, released by two leading senators on Sunday, would leave a decision on how to treat their private shareholders to the courts.

The 442-page draft measure from the Democratic chairman of the Senate Banking Committee and the panel's top Republican would keep in place current terms of the government's bailout of the two companies that require them to sweep all their profits into the U.S. Treasury.

It is silent on whether or not the companies' junior preferred and common shareholders should share in any proceeds when the companies are eventually liquidated.

Fannie Mae and Freddie Mac, the two leading sources of U.S. mortgage funds, were seized by the government during the financial crisis in 2008 and propped up with $187.5 billion in taxpayer funds to keep them solvent. In return, the government got a controlling stake in the companies.

They have since returned to profitability and private shareholders, including Perry Capital and Fairholme Capital Management, have sued the United States over bailout terms that prevent them from buying back the government's shares.

The bill, written by Democrat Tim Johnson and Republican Mike Crapo, would replace Fannie Mae and Freddie Mac with a system based more on private capital that aims to ensure taxpayers are never again put on the hook.

It would aim to shutter the companies over five years, although that deadline could be extended if needed to ensure there are no market disruptions.

"This proposal includes an explicit government guarantee in order to add stability to the economy, keep costs reasonable for borrowers and renters, and ensures fair access to the secondary market for all lenders," said Johnson.

The absence of any provision to compensate private shareholders shows both a reluctance on the part of the two leading lawmakers to interfere with the existing litigation and a concern over the potential for introducing provisions that could be subject to legal challenges.

Private stockholders argue they should be able to benefit from the companies profits now that the duo have paid more in dividends to taxpayers than they had received in support.

The shares of the two so-called government-sponsored enterprises went on a two-day downward slide after Johnson and Crapo announced on Tuesday they had reached a deal on a bill. They recovered some of those losses later in the week.

UNCERTAIN PROSPECTS

The two senators labored intensively to produce a bill that could be enacted this year. But the odds of the legislation clearing Congress are slim, even if they can get the bill through their committee, which itself is uncertain.

With mid-term elections approaching in November, lawmakers are likely to turn their attention to the campaign trail within a few months, leaving little time to deal with the complex issue of revamping the U.S. housing finance system.

In addition, Senate Majority Leader Harry Reid, who controls the agenda in the chamber, appears cool to the legislation.

"It's not a thing that Reid wants to do," said a Senate Democratic aide familiar with the issue. "A lot of Democrats disagree with the content of the proposal."

Fannie Mae and Freddie Mac help ensure the mortgage market stays liquid by buying loans from lenders and repackaging them as securities that they sell to investors with a guarantee.

The bill, which expands on bipartisan legislation introduced by Senators Bob Corker and Mark Warner last year, would replace them with a new industry-financed agency that would provide a government backstop only after private creditors took a hit.

The plan would set up a new federal regulator, called the Federal Mortgage Insurance Corporation, to provide the guarantee and help regulate the housing system.

Many senators want assurances that any new system would not primarily benefit wealthy borrowers or those with the most pristine credit.

The bill would eliminate the affordable housing goals that Congress set for Fannie Mae and Freddie Mac. It would create a single platform for mortgage-backed securities, and establish a system to ensure small mortgage lenders are not shut out by larger competitors.

Some of the banking panel's more liberal members have yet to sign off on the framework of the bill. Without their support, Reid would be even more hesitant to bring it up for a vote.

Even if it did clear the Senate, prospects for passage in the Republican-controlled House of Representatives are slim.

Representative Jeb Hensarling, the Texas Republican who leads the House Financial Services Committee, has spearheaded work on a separate bill that would more sharply reduce the government's role.

Hensarling prefers a privatized system without a government backstop. Any final law is expected to take at least several years to pass.