If you remember during the mortgage meltdown a few years ago, Fannie Mae and Freddie Mac became embroiled in scandal and bad press.  It now looks like there is some movement in the United States Congress to deal with Fannie and Freddie.  CAI National has just reported that eight United States Senators have introduced a bill that would wind down the operations of these quasi-governmental entities.  The big question is whether or when the bill will get traction.  Here’s what CAI has reported: 


Senators Introduce Bipartisan Legislation to Replace Fannie Mae, Freddie Mac

Led by Senators Bob Corker (R-TN) and Mark Warner (D-VA), a bipartisan group of eight U.S. Senators has introduced legislation that if signed into law will make dramatic changes to the nation’s housing finance system.  The "Housing Finance Reform and Taxpayer Protection Act of 2013" proposes to wind down the business operations of housing finance giants Fannie Mae and Freddie Mac and establish a new federal agency to facilitate the flow of mortgage credit to American households.   

The future of Fannie Mae and Freddie Mac, which were seized by the federal government in 2008, has been the subject of intense debate in the Congress. The introduction of the Corker-Warner legislation brings these discussions into sharper focus.

The Corker-Warner legislation replaces Fannie Mae and Freddie Mac with a new agency, the Federal Mortgage Insurance Corporation or FMIC. The FMIC will also replace the Federal Housing Finance Agency, which currently oversees Fannie Mae and Freddie Mac.

In an important shift in housing finance policy, the FMIC will be given authority to issue a federal government guarantee on mortgage backed securities (MBS) issued and sold to investors through its systems. The FMIC guarantee would be explicit, similar to MBS issued through Ginnie Mae, a government agency that facilitates securitization of federally-insured mortgages.

To protect taxpayers against catastrophic losses during severe economic conditions, the FMIC guarantee is structured so that private funds absorb the first 10 percent of losses. Lenders and mortgage securitizers must cover these losses directly and may not count mortgage insurance claims payments against the 10 percent loss position. This places both bank capital and mortgage insurance industry resources in a first loss position so that taxpayers cover losses only when these funds are exhausted.

CAI does not project the Corker-Warner bill will be considered by the U.S. Senate in the near-term. U.S. Senate Banking Committee Chairman Tim Johnson (D-SD) has repeatedly stated his intent to advance legislation to reform the Federal Housing Administration (FHA) prior to considering legislation to broadly reform the housing finance system. Chairman Johnson reiterated this view in response to news the Corker-Warner bill had been introduced.

Any discussion of housing finance reform must also take into consideration the views of House Financial Services Committee Chairman Jeb Hensarling (R-TX), who opposes direct federal mortgage guarantees for the broader housing market. Chairman Hensarling is expected to introduce a series of bills that will target FHA mortgage insurance programs to first-time and low-to-moderate income borrowers and ensure the majority of mortgages are not backstopped by the federal government and taxpayers. This approach differs significantly from that of the Corker-Warner legislation and is an indicator of how far the Congress is from achieving any consensus on the future of housing finance. To read a section-by-section analysis of the proposed reform, click here.