The fate of Fannie Mae and Freddie Mac, the mortgage financing giants saved by taxpayers five years ago and now back to profitability, is no longer on the back burner.
A bipartisan group of senators Tuesday proposed an overhaul that would effectively eliminate Fannie Mae and Freddie Mac over time, and finally move more mortgage and credit risk into the private sector.
Fannie and Freddie own or back about 60 percent of U.S. mortgages. Most Americans don’t know that their mortgages are owned by one of the two companies because their mortgage servicers — the company that bills you — is probably affiliated with a well-known lender.
“Five years after the financial crisis, it is past time for us to modernize our unstable system of housing finance,” said Sen. Bob Corker, R-Tennessee. “The framework we’re presenting here will protect taxpayers while maintaining market liquidity, and is the best opportunity we’ll have to finally move beyond the failed GSE (Government Sponsored Enterprise) model of private gains and public losses.”
Corker is one of 8 lawmakers from the Senate Banking Committee — four Democrats and four Republicans — that say their legislation would protect taxpayers from incurring the costs of housing market downturns. That’s what happened in the 2008 financial crisis when Fannie and Freddie were nationalized and bailed out with $187 billion in taxpayer-funded loans.
Fannie Mae, the biggest mortgage finance company under government control, said last month that it earned a record $58.7 billion profit in the January-March quarter and that it would remain profitable for the “foreseeable future.” Freddie Mac is also profitable again. Freddie said it earned $4.6 billion in the first quarter.
But a rebound in profitability does not justify the continued existence of Fannie and Freddie in its current form, lawmakers and President Obama insist.
Sen. Mark Warner, D-Virginnia, who with Corker spearheaded the effort to revamp the mortgage market system, said housing finance was “the last piece of unfinished business remaining after the 2008 economic meltdown.”
White House spokeswoman Amy Brundage said President Obama welcomed the bipartisan effort led by the two senators.
“We have designed thoughtful reforms that will protect taxpayers from future downturns while responsibly preserving the availability of the 30-year fixed-rate mortgage for homebuyers,” Corker said.
The legislation would create a new Federal Mortgage Insurance Corporation that would provide back-up insurance available only after a substantial amount of private capital is used up.
Here are the highlights of the proposed Housing Finance Reform and Taxpayer Protection Act (S. 1217):
- Mandates 10 percent capital, up front, for the system to protect taxpayers against future bailouts.
- Winds down Fannie Mae, Freddie Mac and the Federal Housing Finance Agency (FHFA) within five years of bill passage.
- Transfers appropriate utility duties and functions to the modernized, streamlined and accountable Federal Mortgage Insurance Corporation (FMIC), modeled in part after the FDIC.
- Replaces the failed “housing goals” of the past with a transparent and accountable market access fund that focuses on ensuring there is sufficient decent housing available. The fund is NOT paid for with tax dollars, but through a small FMIC user fee that only those who choose to use the system pay.
- Ensures institutions of all sizes have direct access to the secondary market so local banks and credit unions aren’t gobbled up by the mega banks when Fannie and Freddie are dissolved.