* Bipartisan group recommends winding down Fannie, Freddie
* MBS issuance would be taken over by private sector
* Public guarantor for MBS under catastrophic circumstances;
funding from premium payments
By Margaret Chadbourn
WASHINGTON, Feb 25 A bipartisan research group
called on Monday for winding down government-controlled
mortgage finance firms Fannie Mae and Freddie Mac as part of an
effort to have private lenders take on more of the risk of
supplying the housing market with credit.
The proposal from the Bipartisan Policy Center aims to
jump-start a stalled debate on the government's role in housing
and help build a consensus for change.
Under the plan, banks and other private companies would take
the lead not only in originating mortgages, but in issuing
mortgage-backed securities as well.
The private sector would then bear the losses for defaulted
mortgages, except in catastrophic circumstances, in which case a
public guarantor funded by premium payments would provide a
"Our housing system is outdated and not equipped to keep
pace with today's demands and the challenges of the imminent
future," the group said in a report outlining its
Fannie Mae and Freddie Mac buy mortgages
from lenders and repackage them as securities for investors,
which they guarantee. The firms were seized by the government in
2008 as spiraling mortgage losses threatened their solvency, and
they have since drawn almost $190 billion from the U.S.
The latest proposal, which was pulled together over the last
16 months by a 21-member commission, would attempt to shrink the
government's footprint in housing and have private capital play
a larger role, a process that promises to take years.
Fannie Mae, Freddie Mac and the Federal Housing
Administration currently back nearly nine of 10 new mortgages.
At a news conference to unveil the report, members of the
commission said winding down Fannie Mae and Freddie Mac would be
a five to seven-year process.
A Treasury Department official said the White House hopes
the proposal moves the debate on housing finance reform forward
and helps build a political consensus for change.
However, with Congress focused on budget debates and with
immigration and gun control top priorities, action on housing is
not likely to come until at least 2014. After years of red ink,
Fannie Mae and Freddie Mac are now profitable and the housing
market is recovering, taking away the urgency for action.
Still, both Democrats and Republicans generally agree the
system needs to change.
"Greater federal intervention was necessary when the market
collapsed, but the dominant position currently held by the
government is unsustainable," the report stated.
In a first step to open the door wider for private capital,
the report said Congress should gradually reduce the loan limits
for government-guaranteed mortgages. The paper suggests limits
of about $275,000 for loans eligible for government backing,
down from $417,000.
Later, Fannie Mae and Freddie Mac would be replaced with a
"public guarantor" that would provide a limited and explicit
government guarantee for mortgage-backed securities, but would
only step in if private insurance companies were unable to cover
losses when loans default.
The public guarantor would oversee the mortgage market, set
standards for the mortgages backing government-guaranteed
securities, and determine which loan products would be eligible
for federal backing. The guarantor would bear a risk only if
private sector credit-risk bearers were wiped out.
To ensure taxpayers are protected, fees would be levied on
mortgage-backed securities to fund the federal backstop.
Many Republicans dislike the idea of an ongoing government
guarantee for the mortgage market. But the commission saw a need
for the government to step in under unusual circumstances.
The commissioners made it clear they believed it would be
important to ensure U.S. home buyers had access to 30-year
fixed-rate mortgages. They also proposed new approaches for the
distribution of federal rental subsidies and calls for greater
attention to rental housing sector.
The commission was headed by two Democrats - former Senator
George Mitchell and former Housing and Urban Development
Secretary Henry Cisneros - and two Republicans - former Senator
and Housing Secretary Mel Martinez and former Senator Kit Bond.