* 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
* Odds slim for legislation this year
By Margaret Chadbourn
WASHINGTON, March 16 A draft bill to wind down
government-run mortgage financiers Fannie Mae and
Freddie Mac, released by two leading U.S. senators on
Sunday, would leave a decision on how to treat their private
shareholders to the courts.
The 442-page draft 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 private shareholders should
share in any proceeds when the companies are 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. In return, the government got a controlling
stake in the companies.
They have since returned to profitability and by the end of
March will have sent the Treasury $202.9 billion in dividends.
Private investors, including Perry Capital and Fairholme
Capital Management, have sued over the bailout terms. They argue
they should stand to benefit from the profits given that the
companies soon will have paid more in dividends to taxpayers
than they received in aid.
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.
Since the government seized the firms, that guarantee has
explicit government backing.
The bill, written by Democrat Tim Johnson and Republican
Mike Crapo, would replace the companies with a new
industry-financed agency. The agency would provide a government
backstop, but it would only kick in after private creditors took
It would aim to shutter the companies over five years,
although that deadline could be extended multiple times if a
replacement system was not ready.
"This proposal includes an explicit government guarantee in
order to add stability to the economy, keep costs reasonable for
borrowers and renters, and ensure fair access to the secondary
market for all lenders," said Johnson.
The absence of any provision to compensate private investors
shows both a reluctance to interfere with the existing
litigation and a concern over the potential for introducing
provisions that could be subject to legal challenges.
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.
"In a liquidation of any big corporation you would always
pay out debt-holders and shareholders with any leftover
proceeds," said Tim Pagliara, chief executive officer of
CapWealth Advisors, a wealth management firm whose clients own
some 8 million shares. "This (bill) attempts to legislate what
happens to Fannie, Freddie shareholders."
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."
The plan would set up a new federal regulator, called the
Federal Mortgage Insurance Corporation, to provide the mortgage
guarantee and help regulate the housing system.
While the bill would abolish affordable housing goals
Congress set for Fannie Mae and Freddie Mac, it would establish
funds to finance rental properties and provide incentives for
lenders to serve lower-income borrowers. The funds would be
financed by industry fees.
It would create a single platform for the securitization of
mortgages, 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