A bipartisan group of senators has proposed replacing U.S.-owned mortgage financiers Fannie Mae and Freddie Mac with a newly created government reinsurer.
A bill to be offered by Senators Bob Corker and Mark Warner reflects a prevailing view among lawmakers that the two government-sponsored enterprises should cease to exist while a federal role in backing mortgage lending should remain. Corker, a Tennessee Republican, and Warner, a Virginia Democrat, held a news conference to introduce the measure yesterday.
The senators have revised their proposal from an earlier version, reducing the losses that lenders would take on bad mortgages during a financial crisis, according to a 154-page copy of the final bill.
“There is a bipartisan effort here that’s thoughtful and it is without question the most thorough Congressional effort to draft a GSE reform legislation to date,” David Stevens, president and chief executive officer of the Mortgage Bankers Association, said in an interview.
The proposal could restart a stalled debate over the future of the U.S. mortgage-finance system. Congress hadn’t previously proposed a measure for replacing Fannie Mae and Freddie Mac, which have operated under U.S. conservatorship since they were seized by regulators during the 2008 credit crisis. President Barack Obama’s administration also hasn’t provided a plan to revamp the government’s role in housing finance.
“Housing finance is the only part of financial reform that really was never taken on and we think it’s a good time to set up a new architecture,” Warner said yesterday in an interview with Betty Liu on Bloomberg Television, where he appeared with Corker.
Jaret Seiberg, an analyst at Guggenheim Securities LLC’s Washington Research Group, said the bill may benefit from its timing.
“It’s an uphill fight for this legislation, but the window is more open now than it has been at any point since the crisis,” Seiberg said. “There seems to be a growing desire on both sides of the Hill to do something.”
Frank Keating, president and CEO of the American Bankers Association, said in a statement that the bill is a “positive first step in what is certain to be a long process toward creating a sustainable, rational and limited role for the federal government in supporting and regulating a mortgage market.”
Amy Brundage, a White House spokeswoman, said the administration welcomes the bipartisan bill.
“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,” Brundage said in an e-mail.
Under the bill, Washington-based Fannie Mae and McLean, Virginia-based Freddie Mac, which package mortgages into securities on which they guarantee 100 percent payment of principal and interest, would be liquidated within five years.
Because the bill would force banks to share the losses from bad mortgages, taxpayers will “know that in the future we won’t have a system where there’s private gains and public losses,” Corker said in the Bloomberg Television interview.
The bill calls for private financiers to hold equity capital of 10 percent of the principal of underlying securities to cover any first loss of the loans. Housing finance participants have been critical of that “first-loss” provision, as it is referred to in the bill, saying it is too big a change from the current system.
The senators defended the 10 percent requirement in a summary of the bill, saying it is more than double the loss experienced by Fannie and Freddie between 2007 and today. “This private capital buffer could have prevented taxpayer assistance following the housing crisis,” according to a summary.
“When you’ve got a 10 percent capital buffer in advance it really causes that pricing of risk to be far less important because what you have out there is a huge investment by the private sector in advance of any kind of government reinsurance and that ought to be soothing to taxpayers,” Corker said at the news conference.
Fannie Mae and Freddie Mac would be replaced by a Federal Mortgage Insurance Corp. that would continue efforts to build a common securitization platform to help small lenders issue securities. It also would continue the two companies’ existing multifamily guarantees.
According to the bill summary, the new entity will be modeled after the Federal Deposit Insurance Corp. It will collect insurance premiums from the industry and maintain an insurance fund. The new entity’s insurance will kick in only after a “substantial amount” of private capital is exhausted to “bring in credit investors who bear the risk of default while maintaining liquidity for the housing finance system.”
The new corporation would be allowed to cover a greater share of losses in an “unusual and exigent circumstance” that threatens mortgage credit availability and the housing finance system, according to the bill. Such assistance would be limited to six months once every three years.
That provision “gives investors more comfort than under the prior version of the bill where they might have been more skittish,” said Clifford Rossi, a former Citigroup Inc. risk manager and managing director who’s now at the University of Maryland’s Robert H. Smith School of Business.
The bill would eliminate the affordable housing goals held by Fannie Mae and Freddie Mac and create a Market Access Fund, paid for by the fees, to maintain access to affordable housing, make grants to state housing agencies and conduct borrower counseling programs.
Fannie Mae and Freddie Mac have begun posting record profits after drawing a total of $187.5 billion in aid from taxpayers to stay afloat since 2008. Corker noted the firms’ recent profits and said the window for reform is closing.
“When folks come in and say ‘well you know Fannie Mae and Freddie Mac make a bunch of money,’ the bottom line is the taxpayer is still on the hook and we need to fix that,” Senator Jon Tester, a Democrat from Montana, said at the news conference.
Heartened by the change of fortune, hedge funds including Paulson & Co. Inc. and Claren Road Asset Management LLC have bought shares of the companies’ junior preferred stock and urged lawmakers to drop plans to eliminate them.
Those junior preferred shares of Fannie Mae were down five cents to 7.70 yesterday. Fannie Mae common shares were down 12.78 percent to $1.57 and Freddie Mac common shares were down 12.79 percent to $1.50.
Senator Jack Reed, a Rhode Island Democrat, is also working on a bill to recast housing finance. Senate Banking Committee Chairman Tim Johnson, a South Dakota Democrat, and Senator Mike Crapo of Idaho, the panel’s top Republican, have said they prefer to work on legislation to revamp the Federal Housing Administration before a Fannie Mae and Freddie Mac bill.
Crapo said he is working with Johnson to take in suggestions to come up with a housing reform plan the committee can begin working on.
“I welcome anyone bringing forward ideas as to how we should approach broader housing reform and I think that this is a good step, also in the sense that it shows some bipartisan work together but I’m not endorsing any particular proposal right now,” Crapo said in an interview.
Representative Jeb Hensarling, the Texas Republican who leads the House Financial Services Committee Chairman, is completing work on a broad housing finance bill that would include changes to FHA and a replacement for Fannie Mae and Freddie Mac.
Hensarling has indicated that he prefers a privatized system without a government backstop. His bill could be introduced before lawmakers leave for their summer recess in August. Any final law is expected to take at least several years to pass.
“That approach in Corker-Warner is going to be the approach that eventually becomes law,” Seiberg said. “The battle is going to be how do get there, how do you structure it and what do you do with Fannie and Freddie. And those are really big decisions that are likely to take longer than this Congress to resolve.”