A bipartisan group of U.S. senators on Tuesday introduced a bill to abolish Fannie Mae and Freddie Mac and replace them with a government reinsurer of mortgage securities that would backstop private capital in a crisis.
The U.S. government seized the mortgage finance firms in 2008 to rescue them from insolvency, spending a total of $187.5 billion to keep them afloat. Fannie Mae and Freddie Mac, which charge lenders a fee in return for guaranteeing principal and interest on mortgages, are now posting record profits.
Under the bill, which is being led by Tennessee Republican Bob Corker and Virginia Democrat Mark Warner, the two companies would be liquidated within five years. The legislation would provide for government reinsurance that would kick in only once private creditors had shouldered large losses.
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"It lessens the footprint of the federal government in housing and winds down Fannie and Freddie," Corker said at a news conference. "But at the same time it keeps the housing finance industry in a liquid state."
The measure seeks to jumpstart the stalled debate over how to remake the U.S. mortgage finance system, whose flaws were exposed by the bursting of the housing bubble and subsequent deep financial crisis.
Corker said the leaders of the Senate Banking Committee "indicated a willingness" to move forward on the bill once they pass separate legislation on the Federal Housing Administration, which they hope to do prior to an August recess.
Analysts cautioned, however, that the legislation was simply a first step of an uphill climb in Congress. Any proposal 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.
A mortgage system overhaul, as a result, is likely to take years.
"Corker-Warner represents a milestone in the government's response to the housing crisis as it is the first comprehensive, bipartisan measure to deal with Fannie, Freddie and mortgage finance," Jaret Seiberg, a senior policy analyst at Guggenheim Securities, said in a research note.
He added, however, that there "is almost zero chance the bill introduced today will be adopted" as it is currently written.
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The Obama administration said it welcomed the effort and would work with both the Senate and House to find a bipartisan way to move forward with a revamp of the current system.
"The president strongly supports comprehensive housing finance reform that would forever end Fannie Mae and Freddie Mac's flawed business model that put the American taxpayers on the hook," said White House spokeswoman Amy Brundage.