In an interview, Garrett described the proposal as a step toward kick-starting the private mortgage securities market if and when Fannie Mae and Freddie Mac are shuttered, as he and other House Republicans would like.
The bill would set standards for the legal contracts that govern pools of loans sold on the secondary market, and require the Federal Housing Finance Agency to regulate those mortgage- backed securities to ensure transparency and underwriting standards, Garrett said.
“A year ago we were just simply saying end it. Now we’re saying end it but let’s also help get things going again,” Garrett said. “It’s a realization we are still in the difficulties we’re in.”
Garrett, chairman of a House subcommittee overseeing Fannie Mae and Freddie Mac, is leading Republican efforts to phase out the government-backed companies, which own or guarantee more than half of U.S. home loans.
The mortgage companies were on the verge of insolvency when they were taken under government conservatorship in September 2008. Since then, they have drawn more than $170 billion in government aid to continue operating.
Privatizing Mortgage Finance
Garrett’s measure to regulate the secondary market is the 16th in a series of bills from House Republicans aimed at dismantling the companies and removing government from the mortgage finance business. All must pass the House Financial Services Committee before they can be considered for by the full house. None have been scheduled for a vote either by the committee or the House.
In the Senate, where Democrats control a majority of vote, the Banking Committee has held hearings on mortgage finance and housing but has yet to consider any legislation.
The bill marks a shift for Garrett, a conservative who has fought to eliminate the government-sponsored enterprises since joining Congress in 2002.
He said the bill acknowledges the complexity and fragility of the housing market and recognizes the industry’s decades-long dependence on tax breaks, grants and government guarantees. The transition to a private mortgage market must be managed carefully, he said.
“It’s only because the government has meddled with the market so long that you need a transition,” he said. “Left to their own devices, markets would over time figure things out and move to a market that would eventually operate. The operative word is ‘eventually’, which takes too long.”
The legislation would require the FHFA, which currently oversees Fannie Mae and Freddie Mac, to develop standards for most mortgage securities. The subprime lending collapse of 2008 triggered broad disagreement over those contracts, known as representations and warranties, and led to dozens of lawsuits.
Since 2007, the largest mortgage lenders have absorbed more than $66 billion of costs tied to repurchases, litigation, foreclosure problems and other errors on faulty mortgages.
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