Senator Johnny Isakson (R-GA) has submitted legislation to Congress that would put Fannie Mae and Freddie Mac out of business while creating a new FDIC-like guarantee facility for the mortgage industry.  The Mortgage Finance Act of 2011 is similar to an idea proposed by the Mortgage Bankers Association (MBA).  Isakson's plan, however, anticipates the termination of the agency he is creating by privatizing it once its value is established.

Isakson maintains that no plan for reform of the two government sponsored enterprises (GSEs) has yet appropriately dealt with the issue of whether there is to be a government wrap or guarantee.  Even though every mortgage-backed security and debt issuance from the GSEs carried a disclaimer that they were not backed by the full faith and credit of the U.S. government, no one ever truly believed it.  And now that the government has funded the two GSEs to the tune of tens of billions of dollars since they were placed in conservatorship it is obvious that under such dire circumstances in the future the government will have no choice but to become involved again.  "The issue then is to recognize that dilemma, eliminate any implied guarantee, replace it with an explicit government guarantee, properly manage and pay for the guarantee, and build in protection for the American taxpayer," the summary of the bill states.

Isakson said that the debate over the guarantee should not be the obstacle when other workable models exist and holds up the FDIC as a prime example.  Banks customers, through fees collected by the bank, pay for the protection of the federal government through an insurance fund and the same can be done for high quality mortgage securitization. 

The bill would create a new Mortgage Finance Agency (MFA) a government agency that guarantees pools of qualified residential mortgages (QRM) for a fee.  The fee will be actuarially based and priced to cover expected losses, capitalize the new catastrophic fund, finance purchases of private sector supplemental insurance and finance operations of the agency.  The fee will protect the agency from the risks of guaranteeing the performance of mortgage backed securities (MBS) by building an industry funded catastrophic fund that would eliminate the need for the government to step in with taxpayer money in the event of a future mortgage market collapse.  After recoupment of start-up cost MFA will operate on revenues and not require further government resources.

The MFA will establish standards for QRM that reflect the statutory language and intent of Dodd Frank rather than the narrower interpretation of the March 2011 rule developed by regulators.  It will specifically permit lending with a 5 percent downpayment supported by private mortgage insurance.  The Agency will also establish standards for multi-family mortgages and guarantee the liquidity of that market by guaranteeing commercial MBS backed by high quality multifamily mortgages.

The MFA will be headed by a director appointed by the president and regulated by a board composed of the Director, a presidentially appointed Vice Chair, the Chair of the Securities and Exchange Commission, the Secretary of Housing and Urban Development, and the Chairman of the Federal Reserve.  There will also be an advisory board selected by the president and composed of individuals with industry experience.

Within three years of the creation of the MFA, Isakson's bill would require it to begin planning for its transition to private hands no later than at the conclusion of its tenth year of operation.  When that transition is complete, all proceeds from the sale of the MFA would be used to satisfy the unpaid balance of any debt remaining from the conservatorship of the GSEs, then the remaining obligations of the MFA with any residual used to pay down the national debt.

Operating on a separate track from the establishment of this guarantee facility is Isakson's proposal to terminate the GSEs.  His bill would require the Federal Housing Finance Agency (FHFA) which functions as conservator for Fannie Mae and Freddie Mac to consolidate their operations and mortgage portfolios and place them into receivership no later than 18 months after the law becomes effective.  Once in receivership the two would be prohibited from engaging in any new business and required to immediately commence an orderly liquidation. 

All remaining proceeds from the operations under receivership and well as monies recovered from the liquidation of GSE assets will go to repaying the taxpayers for the obligations incurred in connection with the failure of the two GSE's in September 2008.

View a one page summary of the bill.

View the full text of the bill.