A bill to abolish the two government sponsored
enterprises (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 a
reinsurer of mortgage-backed securities (MBS) to act as a backstop to
private capital in a crisis.
The legislation will be proposed by a
bipartisan group of senators led by Bob Corker (R-TN) and Mark Warner
(D-VA). It would liquidate the two GSEs, which have been in
government conservatorship since 2008, within five years., replacing
them with a reinsurer, tentatively named the Federal Mortgage
Insurance Corporation. It is designed to insure a liquid mortgage
market would exist even in times of crisis while protecting taxpayers
from loses. The reinsurance would kick in only after private
creditors had absorbed a 10 percent loss of the principal balance of
the affected mortgage-backed securities should the loans go bad.
Reuters reports that analysts were calling the legislation a first
step that faces an uphill battle in Congress, especially in the House
where some members want the government completely out of the housing
finance business. The news agency quotes Jaret Seiberg, a senior
policy analyst at Guggenheim Securities, who said that there "is
almost zero chance the bill introduced today will be adopted" as
it is currently written.
The bill would require private
entities to buy mortgages from lenders and issue them to investors as
securities, according to the discussion draft. Private equity would
be required to absorb a 10 percent loss of the principal underlying
those new mortgage-backed securities if the loans went bad.
The Federal Mortgage Insurance Corp.
would charge and collect fees to cover its operating costs and
maintain a catastrophic fund - probably similar to FDIC depositor
insurance. It would also continue efforts recently initiated by the
Federal Housing Finance Agency (FHFA), the GSE conservator, to build
a common securitization platform for pooling mortgages, issuing and
Since they were placed in conservatorship the GSEs have been
shored up with an aggregate $187.5 billion in money from the U.S.
Treasury but each is now posting record profits. A discussion draft
of the proposed legislation proposes that any proceeds from the wind
down of the GSEs would be paid first to Treasury which holds $188
billion in senior preferred stock in the two. Any remaining moneys
would be paid to preferred stockholders then to common shareholders
of each. Several large stockholders recently filed suit against the
government for losses they claim were caused by the government's
seizure of the companies.