The leaders of the Senate Banking Committee on Tuesday announced an agreement on legislation to wind down government-owned mortgage financiers Fannie Mae and Freddie Mac, jump-starting a long-standing debate that could still take years to resolve.
Shares of both financiers fell sharply after the announcement. Fannie's shares were down nearly 25 percent in late afternoon trading. See what Fannie shares are doing now and see the latest updates on Freddie shares here.
Committee Chairman Tim Johnson, a Democrat, and Senator Mike Crapo, the panel's top Republican, outlined the plan in bullet point format after months of talks that included input from the Obama administration. They said they intended to introduce a bill soon, with an eye to having the panel vote on it within weeks.
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Fannie Mae and Freddie Mac, which own or guarantee 60 percent of all U.S. home loans, provide a steady source of mortgage funds by buying loans from lenders and packaging them into securities they sell to investors with a guarantee.
Their central role in the mortgage market led the government to bail them out to the tune of $187.5 billion in the midst of the 2007-2009 financial crisis, and lawmakers want to make sure taxpayers are never on the hook again.
Under the outline from Johnson and Crapo, private interests would take the first 10 percent of any mortgage losses, before an industry-financed government backstop would kick in.
"This agreement moves us closer to ending the five-year status quo and beginning the wind down of Fannie and Freddie, while protecting taxpayers," Crapo said in a statement.
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Analysts cautioned, however, that the lawmakers face an uphill battle in trying to enact legislation this year. Any bill that clears the Democrat-led Senate would have to win approval in the Republican-controlled House of Representatives, where some lawmakers want a fully private system.
"This is another step towards reform, but we are still years away from having either the legislative capacity or market willingness to embrace a new mortgage finance system," said Isaac Boltansky, a policy analyst with Compass Point Research and Trading.
Under the proposal, Fannie Mae and Freddie Mac would be wound down and replaced with a new government reinsurer called the Federal Mortgage Insurance Corp. The new entity, which would be funded by user fees, would issue a federal guarantee for mortgage bonds that would kick in only after private creditors had taken a hit.
Included in the outline is a mandate that strong loan underwriting standards be built into the new system.