* Lawmakers aim to jump-start debate on housing finance
* Fannie Mae, Freddie Mac would be liquidated under plan
* Government would offer a catastrophic loan backstop
* New agency would collect fees to cover its costs
By Margaret Chadbourn
WASHINGTON, March 11 The leaders of the Senate
Banking Committee on Tuesday announced an agreement on
legislation to wind down government-owned mortgage financiers
Fannie Mae and Freddie Mac, jump-starting a
long-standing debate that could still take years to resolve.
Committee Chairman Tim Johnson, a Democrat, and Senator Mike
Crapo, the panel's top Republican, outlined the plan in bullet
point format after months of talks that included input from the
Obama administration. They said they intended to introduce a
bill soon, with an eye to having the panel vote on it within
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 with a guarantee.
Their central role in the mortgage market led the government
to bail them out to the tune of $187.5 billion in the midst of
the 2007-2009 financial crisis, and lawmakers want to make sure
taxpayers are never 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 industry-financed 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," Crapo said in a statement.
Analysts cautioned, however, that the lawmakers face an
uphill battle in trying to enact legislation this year. Any bill
that clears the Democrat-led Senate would have to win approval
in the Republican-controlled House of Representatives, where
some lawmakers want a fully private system.
"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
SHRINKING THE MARKET?
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. The new entity, which would
be funded by user fees, would issue a federal guarantee for
mortgage bonds that would kick in only after private creditors
had taken a hit.
Included in the outline is a mandate that strong loan
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 downpayments will prevent less affluent
Americans from accessing credit.
"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.
Fannie Mae and Freddie Mac play a huge role in keeping
borrowing costs low for homeowners, and the guarantees they
provide investors are the main reason Americans are able to
secure 30-year fixed-rate mortgages.
Whether enough private capital would flow into the market to
fully replace their footprint is uncertain. Some analysts said
placing more of the burden of losses on private investors would
lead to a shrinking of the $10 trillion U.S. mortgage market.
"The Johnson-Crapo bill means a redesigned, smaller U.S.
mortgage market because it takes a tough stand on taxpayer
protection," said Karen Shaw Petrou, managing partner of Federal
The outline from the two senators said they plan to
eliminate affordable housing goals that Congress had given
Fannie Mae and Freddie Mac. Instead, they would establish
housing-related funds to ensure the availability of affordable
rental properties. These funds would be financed through a user
fee on lenders that seek government backing for their loans.
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.
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 the U.S. Treasury for the controlling stake the
government took when it bailed them out.
Private shareholders, including Perry Capital and Fairholme
Capital Management, have sued the United States over bailout
terms that prevent the companies from using their profits to buy
back the government's shares.
Johnson and Crapo did not outline how they believed these
private shareholders should be handled. The preferred shares of
the two companies , which have been trading
at their highest levels since 2008, fell sharply on Tuesday.