A bipartisan group of U.S. senators is putting the final touches on a plan to liquidate Fannie Mae and Freddie Mac and replace them with a government reinsurer of mortgage securities behind private capital.
The proposed legislation, which could be introduced this month, would require private financiers to take a first-loss position adequate to cover price declines as steep as those seen during recessions over the past century, according to a draft obtained by Bloomberg News.
The bill, which is being written by Tennessee Republican Bob Corker and Virginia Democrat Mark Warner with input from other senators, is still being drafted. As the first serious bipartisan effort to shape a new housing finance system, it could frame a discussion that is heating up as the market rebounds.
“A bipartisan bill that’s thorough becomes, at a minimum, a good baseline to begin the process of the full debate that could go through Congress,” David Stevens, president of the Mortgage Bankers Association, said in an interview.
According to the draft, Washington-based Fannie Mae and McLean, Virginia-based Freddie Mac would be liquidated within five years and the U.S. Treasury would assume responsibility for their existing mortgage guarantees. The two companies, which have been under U.S. conservatorship since 2008, package mortgages into securities on which they guarantee payment of principal and interest.
The two government-sponsored enterprises have begun posting record profits after drawing a total of $187.5 billion in aid from taxpayers to stay afloat after the housing crisis brought them to the brink of bankruptcy. Heartened by the change of fortune, hedge funds including Paulson & Co Inc. and Claren Road Asset Management LLC have been buying shares of the companies’ junior preferred stock and urging lawmakers to drop plans for abolishing them.
The discussion draft of the bill says any proceeds from the liquidation first would go to the U.S. government as the senior preferred shareholder in each of the companies, and then to holders of junior preferred shares, followed by holders of the common shares.
The new agency, to be named the Federal Mortgage Insurance Corp., would continue existing efforts to build a common securitization platform and would have the capacity to help small lenders issue securities. The agency would continue Fannie Mae and Freddie Mac’s existing multifamily housing guarantees.
“We continue to work on a responsible and bipartisan proposal that will maintain the availability of mortgage credit, expand the role of the private sector in housing finance, and better protect the taxpayers,” Kevin Hall, a spokesman for Warner, said in an e-mail.
Laura Herzog, a Corker spokeswoman, said it would be premature to discuss specifics of the bill “because the process is still very fluid.”
“We hope to find something that materially improves from the past system where gains were privatized, losses were left for the taxpayer to clean up, and the system was way too thinly capitalized against downturns,” she wrote in an e-mail.
The draft has been circulated among housing-industry participants and is likely to change as they provide feedback.
“Going from various proposals to a document that contains actual legislative language is an important step in the road to GSE reform,” Isaac Boltansky, an analyst at Compass Point Research and Trading, said in an interview. “Given the size and complexity and government-dominance of the mortgage market, lawmakers have to move slowly and really take note of input from various stakeholders.”
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