Government-owned mortgage finance giants Fannie Mae and Freddie Mac would be shut down within five years so taxpayers are no longer “on the hook” for future losses, under a bipartisan housing reform bill introduced Tuesday in the Senate.
In the wake of the housing crisis in 2008, Fannie and Freddie received a combined $187.5 billion in a bailout package designed to prevent a complete market collapse and save the economy from disaster. But Washington has been antsy to get out of the mortgage business ever since.
The Housing Finance Reform and Taxpayer Protection Act would do just that, winding down the government’s role in Fannie and Freddie and replacing them with a new privately capitalized system that has market-liquidity requirements and loss provisions to protect taxpayers against future bailouts, if the economy once again turns sour.
The bill is backed by a bipartisan group of eight senators from the banking committee, including lead sponsors Bob Corker, Tennessee Republican, and Mark R. Warner, Virginia Democrat.
“It lessens the footprint of the federal government in housing,” Mr. Corker said at a news conference to introduce the bill.
With the recent wave of economic-regulation legislation under the Obama administration, from the Dodd-Frank financial reform to the Affordable Care Act, housing reform would seem to be a logical next step, the lawmakers said.
Mr. Warner said housing reform is the “last piece of unfinished business” that Washington has not yet addressed since the financial crisis broke out in 2008.
“We’ve done a lot of reform here in the last couple years — health care was one, pension reform, we’re looking at immigration reform — and now is the time for housing reform,” said Sen. Dean Heller, Nevada Republican and another co-sponsor. “If there was ever a time, this is the time.”
The housing reform bill would create the Federal Mortgage Insurance Corp. to replace Fannie and Freddie with a more privatized system.
Under the current system, Fannie and Freddie package mortgages into securities and sell them to financiers, guaranteeing 100 percent of the principle and interest should the investments go sour. But the new bill guarantees only 90 percent, and would require financiers to take the “first loss” of as much as 10 percent, with liquidity funds that they raise before they buy the securities.
The new entity also would wind down goals for the number of loans that go to households with less than median income level, and replace it with a user fee that would subsidize an affordable-housing fund.
Critics have called a 10 percent liquidity requirement too high, but Mr. Corker indicated it would introduce more responsibility of investors into the system if they know the government will not cover all of their losses.
“As we began to look at what the market can bear, that’s the number we arrive at,” he said.
Sen. Kay R. Hagan, North Carolina Democrat and another co-sponsor, called for the government to move away from the “status quo” of propping up Fannie Mae and Freddie Mac.
“Never again should the taxpayers be on the hook for losses obtained in the private sector,” she said.
The other co-sponsors are Republican Sens. Mike Johanns of Nebraska and Jerry Moran of Kansas, and Democratic Sens. Jon Tester of Montana and Heidi Heitkamp of North Dakota.