House Republicans, led by the chairman of the House Financial Services Committee, Rep. Jeb Hensarling, R-Texas, say their bill to vastly reduce the government's involvement in the mortgage finance system will be a boon to consumers, spurring competition and innovation in the private sector and giving borrowers more choices. They blame Fannie and Freddie for inflating the market before the housing crash, contributing to the boom-bust cycle.
Hensarling, in a statement Tuesday, said his plan "puts private capital at the center of the housing finance system, ends the bailout of Fannie Mae and Freddie Mac and sustains the 30-year fixed rate mortgage—all goals the president today says he supports."
Hensarling's bill recently cleared his committee without any Democratic votes and is expected to get a House vote in the next few months.
Housing advocates warn that if the government's role is scaled back too far, mortgages could be pushed out of reach for people with lower credit scores and smaller savings for down payments.
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They say 30-year fixed-rate mortgages, long a staple of the housing market, could become harder to find and more expensive for borrowers with modest incomes because lenders would be less willing to offer such longer-term loans without government guarantees.
"Those people are now going to be locked out of the system or many will end up paying a premium because of these changes," said John Taylor, chief executive of the National Community Reinvestment Coalition, a housing advocacy group.
Fannie and Freddie own or guarantee nearly half of all U.S. mortgages and 90 percent of new ones. They buy mortgages from lenders, package them as bonds, guarantee them against default and sell them to investors. That helps banks get rid of risk from their balance sheets, freeing up more money to lend.
During the financial crisis, as house prices tanked and foreclosures surged, the government rescued Fannie and Freddie from a flood of defaults on risky loans the agencies had guaranteed, many aimed at providing affordable housing for lower-income borrowers.
Like many banks, the two companies had relaxed their standards on loans they bought or guaranteed during the boom. High-interest loans, some with low "teaser" rates, were given to risky borrowers.
Now under government control, Fannie and Freddie are hugely profitable, and thanks in large part to the housing recovery they're pumping billions of dollars into the U.S. Treasury. Fannie and Freddie have paid the Treasury $132 billion, more than two-thirds of the bailout.
In the Democratic-controlled Senate, a bipartisan bill by Sens. Bob Corker, R-Tenn., and Mark Warner, D-Va., would gradually replace Fannie and Freddie over five years with a new agency having a more limited role insuring mortgage securities against catastrophic losses.
The bill would create a new Federal Mortgage Insurance Corp. that would provide backstop insurance available only after a substantial amount of private capital is used up. Investors would pay insurance fees to the corporation while agreeing to put a substantial amount of their own capital at risk.
The bill in the GOP-controlled House nearly eliminates the government's role in the mortgage financing system. It would limit the Federal Housing Administration to insuring loans only for first-time and lower-income borrowers.