McCain Amendment Would Take GSEs off Taxpayer Support

Sen. John McCain (Arizona) and two other Republicans have introduced an amendment to the Senate's regulatory reform package that would wean mortgage giants ""Fannie Mae"":http://www.fanniemae.com and ""Freddie Mac"":http://www.freddiemac.com off of federal funding over the next five years and completely dissolve them after 15 years.

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“The events of the past two years have made it clear that never again can we allow the taxpayer to be responsible for poorly-managed financial entities who gambled away billions of dollars,” Sen. McCain said in a statement to the press.

He continued, “Fannie Mae and Freddie Mac are synonymous with mismanagement and waste and have become the face of ‘too big to fail’. The time has come to end Fannie Mae and Freddie Mac’s taxpayer-backed slush fund and require them to operate on a level playing field.”

Congress, and the GOP in particular, have repeatedly pressed the administration to figure out just what to do with the GSEs. Treasury Secretary Timothy Geithner has made it clear that he doesn’t plan to release any plans for Fannie and Freddie until next year. Tired of playing the waiting game, the Republican senators have decided to move forward with their own proposal.

Their legislation, dubbed the ""GSE Bailout Elimination and Taxpayer Protection Amendment"":http://mccain.senate.gov/public/index.cfm?FuseAction=PressOffice.PressReleases&ContentRecord_id=6a425eed-e7db-888f-e40a-78b6d2c7a479, provides for a finite end to the current conservatorship period for both companies â€" two years from the date the amendment is enacted.

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The GSEs’ regulator, the Federal Housing Finance Agency (FHFA) has an option to extend conservatorship for six months if the agency determines and notifies Congress that adverse market conditions exist and an exit from conservatorship could prove precarious for the mortgage industry.

The amendment spells out that if at the end of the conservatorship either GSE is not financially viable, FHFA must place that GSE in receivership. If the GSE is financially viable, then it would be allowed to re-enter the market “under new operating restrictions.”

These new restriction would include a repeal of the GSEs’ affordable housing goals, a reduction in assets allowed on each company’s books, retraction of the higher conforming loan limits allowed for certain areas, and full Securities and Exchange Commission (SEC) registration for the GSEs’ securities.

The amendment also outlines the ultimate wind-down of operations and dissolution of the enterprises. It establishes a three-year period after the end of conservatorship for a ""financially viable"" GSE to operate under the new operating restrictions until their government charter expires. At that time, the legislation calls for a 10-year period to create a separate holding corporation and a dissolution trust fund for any remaining mortgages or debt obligations held by the GSEs.

So after 15 years, Fannie and Freddie would be no more.

Together, the two mortgage financiers have drawn $110 billion in taxpayer dollars since they were put into conservatorship in September 2008. ""Freddie Mac said Wednesday"":http://dsnews.comarticles/freddie-mac-posts-67-billion-loss-in-q1-2010-05-05 that it needs another $10.6 billion from the Treasury to cover its net worth deficit from first-quarter operations.

The latest ""estimates from the Congressional Budget Office"":http://www.cbo.gov/ftpdocs/108xx/doc10878/01-13-FannieFreddie.pdf, issued in January, put the cost to subsidize Fannie Mae and Freddie Mac through the year 2019 at $389 billion. But Sen. Judd Gregg (New Hampshire), who co-sponsored the amendment with McCain, says it’s time for the federal government to come clean about the real costs of keeping the two companies afloat. He says the figure is closer to $500 billion.