A bipartisan group of senators on Tuesday proposed an overhaul of the housing finance system that would gradually eliminate Fannie Mae and Freddie Mac, the two government-sponsored mortgage-guarantee giants, and shift more mortgage and credit risk to the private sector.
Eight lawmakers from the Senate Banking Committee – four Democrats and four Republicans – said their legislation would protect taxpayers from bearing the costs of housing market downturns, as occurred in the 2008 financial crisis when Fannie and Freddie were nationalized and bailed out with $187 billion in taxpayer-funded loans.
“All these years later, nothing has changed,” said Sen. Bob Corker, R-Tenn. “It’s time to end this failed model.”
Sen. Mark Warner, D-Va., who, with Corker, spearheaded the effort to revamp the mortgage market system, said housing finance was “the last piece of unfinished business remaining after the 2008 economic meltdown.”
White House spokeswoman Amy Brundage said President Barack Obama welcomed the bipartisan effort led by the two senators. “The president strongly supports comprehensive housing finance reform that would forever end Fannie Mae and Freddie Mac’s flawed business model that put the American taxpayers on the hook.”
The legislation would create a new Federal Mortgage Insurance Corporation that would provide backstop insurance, which would be available only after a substantial amount of private capital is used up.
Fannie and Freddie currently own or guarantee half of all U.S. mortgages, and back nearly 90 percent of new ones. With the revival of the housing market, the two enterprises have returned to profitability, with profits returning to the government. Fannie and Freddie don’t directly make loans, but buy mortgages from lenders, package them as bonds, guarantee them against default and sell them to investors.
The legislation would wind down Fannie and Freddie operations within five years, and require that every mortgage-backed security issued through the new FMIC will have a private investor bearing the first risk of loss and holding at least 10 percent in equity capital for every dollar at risk.
Housing goals that have forced the two government-sponsored enterprises to ensure that loans go to those below the median income level would be eliminated, replaced by a market access fund for affordable housing that would be paid for by a user fee.
It would also take measures to ensure that smaller community banks and credit unions are not squeezed out by the mega-banks in competing for a share of the secondary mortgage market.
Corker said the Banking Committee was already working on legislation to overhaul the Federal Housing Administration, a government agency that insures housing loans by banks, and said it was a goal to move on the Fannie-Freddie legislation by this fall.
The Bipartisan Policy Center’s Housing Commission, chaired by former Sens. George Mitchell, D-Maine, and Christopher “Kit” Bond, R-Mo., and former Housing and Urban Development secretaries Mel Martinez and Henry Cisneros, commended the senators for introducing the bill, and said it was similar to their plan to create a new system that encourages private capital to play a greater role in bearing mortgage-credit risk.
The Securities Industry and Financial Markets Association (SIFMA) said, “The time to address the future of mortgage finance is overdue, and we agree with the fundamental premise that private capital must play a larger role than it does in today’s market.”