Leaders of the U.S. Senate Banking Committee announced long-awaited plans to dismantle Fannie Mae and Freddie Mac, pushing the companies’ common shares to their biggest intraday drop in 10 months.
Fannie Mae shares tumbled as much as 44 percent, paring the losses to 31 percent to close in New York at $4.03, after Edwin Groshans, a managing director at Washington-based equity research firm Height Analytics LLC, described the proposal as holder-negative. Freddie Mac fell 27 percent to close at $4.04. Preferred shares also dropped, some by as much as 12 percent.
The bipartisan measure, drafted with input from President Barack Obama’s administration, would replace the U.S.-owned mortgage financiers with government bond insurance that would kick in only after private capital suffered losses of at least 10 percent, Senate Banking Committee Chairman Tim Johnson and Senator Mike Crapo said in a statement yesterday. The bill would require most borrowers to make down payments of at least 5 percent.
“This starts the ball rolling to get housing finance reform done,” Jaret Seiberg, policy analyst at Guggenheim Securities LLC’s Washington Research Group said in a telephone interview. “This issue remains alive and kicking and whatever happens in the next few weeks is going to tell us whether we get to the finish line or not.”
Crapo and Johnson, a South Dakota Democrat, have been facing mounting pressure to introduce the legislation with enough time left to push it through so it could become law this year. Even with enough time, it is far from certain that the Senate and the Republican-led House will reach agreement on a bill and pass it to Obama for approval.
“ This agreement moves us closer to ending the five-year status quo and beginning the wind down of Fannie and Freddie while protecting taxpayers with strong private capital, building the components for a stable secondary market and avoiding repeating the mistakes of the past,” said Crapo of Idaho, the panel’s top Republican.
The White House released a statement yesterday calling the Crapo-Johnson proposal “a workable bipartisan approach to complete the biggest remaining piece of post-recession financial reform.”
The senators said they will introduce their bill “in the coming days” and begin fine-tuning it with other members of the committee in the coming weeks.
The Johnson-Crapo plan is based on a bill introduced last year by Senators Bob Corker, a Tennessee Republican, and Mark Warner, a Virginia Democrat. The new measure would set specific benchmarks for transitioning from Fannie Mae and Freddie Mac to the revised system, ensuring that the companies would withdraw only after the replacement was functioning.
The government would play a smaller role in the market by taking a backstop position on mortgage securities, stepping in only if private interests were wiped out by catastrophic losses. A new agency called the Federal Mortgage Insurance Corp. would charge fees to issue a government guarantee on bonds that would kick in only after private investors suffered losses of at least 10 percent.
The bill would establish funds for affordable housing that would be paid for by a fee on users of the new government reinsurance agency.
To increase access for community banks, the measure would establish a mutual cooperative jointly owned by small lenders to provide a cash window for eligible loans while allowing the firms to retain servicing rights.
Johnson and Crapo have to navigate Democratic politics on the banking panel, which must give preliminary approval to the measure. Senate Democrats including Elizabeth Warren of Massachusetts and Sherrod Brown of Ohio have said they won’t back a plan unless it guarantees affordable loans for most buyers and includes significant support for low-income rental housing.
Without the vote of a majority of the 12 Democrats on the panel, the measure will have trouble gaining wider support from the full Democrat-led Senate.
In the House, a bill that would almost entirely privatize the mortgage market, written by Financial Services Committee Chairman Jeb Hensarling of Texas, hasn’t gained enough support for a vote of the full chamber. It is unclear whether the House would act this year even if the Senate passes a bill.
Seiberg, the policy analyst, said the House could be pressed to act if the Senate moves forward.
“If it comes off the floor with a lot of support, the pressure’s going to be on the House to find a middle ground and actually get something done,” he said.
Johnson and Crapo didn’t say how shareholders in Washington-based Fannie Mae and McLean, Virginia-based Freddie Mac would be treated as the two companies are wound down. The companies, bailed out with $187.5 billion from taxpayers after they neared bankruptcy in 2008, have begun to return billions of dollars as the housing market rebounds.
Investors including hedge fund Perry Capital and mutual-fund firm Fairholme Capital Management have sued the U.S. challenging an arrangement in which the Treasury takes all of the companies’ quarterly profits. Hedge funds have also lobbied Congress to re-capitalize the companies instead of winding them down.
“All the sincere effort expended by the Senate Banking Committee simply confirms that there is no better alternative,” Fairholme Chief Investment Officer Bruce Berkowitz said in a statement. “Their core insurance businesses need to be restructured in a way that compensates and protects the taxpayer, not thrown away. No legislation is required for this - – only an end to the conservatorship and the restoration of an independent regulator who insists they conserve their capital and operate their business prudently.