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Plans to Wind Down Fannie and Freddie Move Forward

The leaders of the Senate Banking Committee announced Tuesday plans to move forward on a new proposal to wind down Fannie Mae and Freddie Mac in favor of a new government backstop for private financiers.

According to committee chairman Tim Johnson (D-South Dakota) and ranking member Mike Crapo (R-Idaho), the newly unveiled reform proposal is the result of months of exploratory hearings, negotiations, and drafting work from members on both sides of the aisle.

“There is near unanimous agreement that our current housing finance system is not sustainable in the long-term and reform is necessary to help strengthen and stabilize the economy,” Johnson said. “This bipartisan effort will provide the market the certainty it needs, while preserving fair and affordable housing throughout the country.”

The proposal builds on a bill introduced last year by Sens. Bob Corker (R-Tennessee) and Mark Warner (D-Virginia), keeping as its base the eventual elimination of Fannie Mae and Freddie Mac and installation of a Federal Mortgage Insurance Corporation (FMIC), which would be modeled after FDIC and which would assist private creditors with losses after the first 10 percent.

Also included in the proposal is a provision requiring strong underwriting standards that would mirror the Consumer Financial Protection Bureau’s qualified mortgage definition and would set a phased-in down payment requirement of 5 percent—except for first-time borrowers, who would be required to pay 3.5 percent.

Finally, other provisions in the outlined plan call for the elimination of affordable housing goals (to be replaced with funds created through a small FMIC user fee) and the formation of a mutual cooperative owned by small lenders to ensure institutions of all size have access to the secondary market.

“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,” Crapo said.

With Johnson and Crapo’s draft not yet complete, it remains to be seen how the proposal will fare in front of the largely Democratic Senate and the Republican-controlled House.

On the industry side, responses seemed positive, with Mortgage Bankers Association (MBA) president and CEO David Stevens saying the announcement “reinforces the immediate need to address GSE reform in a substantive, transparent way.”

“Chairman Johnson and Ranking Member Crapo are to be commended for coming together in a bi-partisan fashion and advancing a comprehensive solution to improve the function of the secondary mortgage market in a way that engages private capital and reduces risk for taxpayers,” he added.

Perhaps less enthusiastic would be Fannie and Freddie’s investors, who have sued the government, urged corporate changes, and even offered to buy parts of the GSEs’ businesses in hopes of seeing returns now that both enterprises are profiting again.

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