A bipartisan group of senators introduced a plan Tuesday to reform the housing finance system and wind down the government-sponsored enterprises Fannie Mae and Freddie Mac.
Eight members of the Senate Banking Committee, including both Republicans and Democrats, proposed creating a new agency modeled after the Federal Deposit Insurance Corporation to provide backstop insurance for mortgage-backed securities. The agency, which would be called the Federal Mortgage Insurance Corporation or FMIC, would be funded with premiums from private loan issuers. It would require investors to hold 10 cents for every dollar at risk, and only provide insurance payouts after a substantial amount of private capital was exhausted.
The plan would also dissolve mortgage buyers Fannie and Freddie over a period of years while the FMIC was adopted, and abolish the regulatory agency now responsible for overseeing the two mortgage giants currently being run by the federal government. In addition, it would include an expiration provision to end the FMIC in favor of a fully privatized system of housing finance after eight years, following a review process.
The plan, introduced in the Capitol by Senators Bob Corker, R-Tenn., Mark Warner, D-Va., Mike Johanns, R-Neb., Jon Tester, D-Mont., Dean Heller, R-Nev., Heidi Heitkamp, D-N.D., Jerry Moran, R-Kan., and Kay Hagan, D-N.C., closely follows the recommendations of a recent Urban Institute report developed by a group of housing experts spanning the ideological spectrum.
Warner called housing finance the “last piece of unfinished business remaining after the 2008 economic meltdown,” and stressed the need to avoid future taxpayer bailouts of private housing investors. Fannie and Freddie were taken into government conservatorship in fall 2008 after becoming insolvent, and have since received $187.5 billion in public support, according to the Federal Housing Finance Agency’s most recent estimate. Corker called the bill the “best opportunity we’ll have to finally move beyond the failed GSE model of private gains and public losses.”
The bill’s authors aim to ensure mortgage market liquidity as well as a privately capitalized system. Currently, about 90 percent of home loans are backed by government guarantees from Fannie Mae, Freddie Mac or the Federal Housing Administration. At a press conference the previous Wednesday, Federal Reserve Chairman Ben Bernanke had said of Fannie and Freddie that “they are the mortgage-backed security market. Fannie and Freddie are basically it.”
Fannie and Freddie have returned to profitably in recent months as the housing market has recovered, and sent a nearly $67 billion dividend to the Treasury in the spring. Nevertheless, many lawmakers want to wind down the companies to avoid future losses. “[I]t’s a lottery ticket at best… I just don’t see any appetite in Congress for Fannie and Freddie ever being returned to the private market,” Corker told Bloomberg in mid-June. The senators also expressed a desire to ensure that the two GSEs would never again be in a position to receive bailouts or cause distress in the financial system.
The bill received a warm reception from a number of key housing market participants and analysts. Corker’s office emailed reporters praise for the bill from the heads of the Mortgage Bankers Association and the American Bankers Association as well as from the Independent Community Bankers of America and the Bipartisan Policy Center.
A number of pieces would have to fall into place for the bill to become law. It would have to win approval in the Democrat-majority Senate and from the White House in addition to passing the GOP-led House. Jeb Hensarling, the Texas Republican who is chairman of the House Financial Services Committee, would favor a privatized system that didn’t include a government backstop, according to Bloomberg.
Nevertheless, Heitkamp said she helped draft the bill because “it’s not acceptable anymore to delay making decisions based on ideology … it’s time for reform, let’s have the discussion.”