Senate Bill to Abolish Fannie and Freddie Hits the Floor

A bill to abolish the two government sponsoredrnenterprises (GSEs) Freddie Mac and Fannie Mae will finally be introduced today after months of preparation.  Although not widely believed to be passable in its current form, any iteration is likely to be significant for the housing market.  As it sits, the bill would replace the GSEs with arnreinsurer of mortgage-backed securities (MBS) to act as a backstop tornprivate capital in a crisis.</p

The legislation will be proposed by arnbipartisan group of senators led by Bob Corker (R-TN) and Mark Warnerrn(D-VA). It would liquidate the two GSEs, which have been inrngovernment conservatorship since 2008, within five years., replacingrnthem with a reinsurer, tentatively named the Federal MortgagernInsurance Corporation. It is designed to insure a liquid mortgagernmarket would exist even in times of crisis while protecting taxpayersrnfrom loses. The reinsurance would kick in only after privaterncreditors had absorbed a 10 percent loss of the principal balance ofrnthe affected mortgage-backed securities should the loans go bad. </p

Reuters reports that analysts were calling the legislation a firstrnstep that faces an uphill battle in Congress, especially in the Housernwhere some members want the government completely out of the housingrnfinance business. The news agency quotes Jaret Seiberg, a seniorrnpolicy analyst at Guggenheim Securities, who said that there “isrnalmost zero chance the bill introduced today will be adopted” asrnit is currently written.</p

The bill would require privaternentities to buy mortgages from lenders and issue them to investors asrnsecurities, according to the discussion draft. Private equity wouldrnbe required to absorb a 10 percent loss of the principal underlyingrnthose new mortgage-backed securities if the loans went bad.</p

The Federal Mortgage Insurance Corp.rnwould charge and collect fees to cover its operating costs andrnmaintain a catastrophic fund – probably similar to FDIC depositorrninsurance. It would also continue efforts recently initiated by thernFederal Housing Finance Agency (FHFA), the GSE conservator, to buildrna common securitization platform for pooling mortgages, issuing andrnselling MBS. </p

Since they were placed in conservatorship the GSEs have beenrnshored up with an aggregate $187.5 billion in money from the U.S.rnTreasury but each is now posting record profits. A discussion draftrnof the proposed legislation proposes that any proceeds from the windrndown of the GSEs would be paid first to Treasury which holds $188rnbillion in senior preferred stock in the two. Any remaining moneysrnwould be paid to preferred stockholders then to common shareholdersrnof each. Several large stockholders recently filed suit against therngovernment for losses they claim were caused by the government’srnseizure of the companies.

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