Government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac would be liquidated over a five-year period and replaced by an entity offering government reinsurance for mortgage-backed debt under a bill being drafted by a bipartisan group of senators led by Tennessee Republican Bob Corker and Virginia Democrat Mark Warner.
The proposed legislation, which is still being conceived, is the first to outline a new housing finance system since the GSEs were taken over by the government in 2008 as a result of the housing crisis that brought them to near bankruptcy. In effect, the bill serves as a ‘conversation piece’ to launch the legislative debate over the future of the U.S. housing finance system – a highly complex topic that is expected to result in months, if not years, of political wrangling.
Under the nebulous plan, the U.S. Treasury would assume responsibility for Fannie and Freddie's existing mortgage guarantees. Any proceeds from the liquidation first would go to the senior preferred shareholder – the U.S. government – then to holders of junior preferred shares, followed by holders of the common shares, according to Reuters report citing a preliminary draft of the bill.
It is likely that the legislation will go through much iteration, as government officials, industry experts and other stakeholders provide feedback. The proposal may also have to be reconciled with other bills, should alternatives be introduced in the House and Senate.
Meanwhile, the two GSEs have been posting record profits, prompting investment firms including Fairholme Capital Management, Paulson & Co. Inc. and Claren Road Asset Management LLC to purchase shares of the companies' stock. Fairholme Capital Management on Monday acquired a combined $2.4 billion stake in the preferred shares of Fannie and Freddie, making a long-shot bet that they will be reborn as private companies.
‘The time to restructure Fannie and Freddie is upon us,’ Fairholme said in a statement on Monday. ‘Sustaining our nation's economic recovery requires it.’
With Fannie's and Freddie's profits forecast to only increase, many investors are also urging lawmakers to drop or postpone their plans for liquidating them.
According to the draft bill, the new reinsurance agency would be named the Federal Mortgage Insurance Corp. Part of its role would be to continue with the current effort to develop a common securitization platform – as well as to enact new measures to help small lenders issue securities.
Laura Herzog, spokeswoman for Sen. Corker, told Reuters it was premature to discuss specifics of the bill ‘because the process is still very fluid.’
‘We hope to find something that materially improves from the past system where gains were privatized, losses were left for the taxpayer to clean up, and the system was way too thinly capitalized against downturns,’ Herzog reportedly wrote in an email.
Meanwhile, the Mortgage Bankers Association is pushing for reforms that will provide smaller lenders with equal access to the secondary market, as well an explicit federal guarantee for certain mortgage-backed securities.
Any reforms enacted should ‘promote liquidity and stability by connecting global pools of capital to the U.S. mortgage market; provide certainty of execution for borrowers, lenders, and investors; provide competitive pricing for a consistent offering of core products, including the 30-year, fixed-rate, pre-payable mortgage; provide an efficient means of hedging interest rate risk; and ensure vibrant, dynamic and competitive primary and secondary markets for the ultimate benefit of homeowners,’ the MBA states in a new white paper titled ‘A Secondary Market That Works For Smaller Lenders.’
‘Achieving these objectives will require an explicit federal guarantee, albeit one that is well defined, limited and called upon only after deep layers of private capital have been exhausted,’ the MBA says. ‘An important corollary is that any reforms – whether transition steps or end-state reforms – should also ensure that the federally supported secondary market provides equal access and execution options that work for smaller, community-based lenders.’