The leaders of the U.S. Senate Banking Committee on Tuesday outlined plans for legislation to wind down government-owned mortgage financiers Fannie Mae and Freddie Mac that they said would continue to provide access to long-term, fixed-rate mortgages.
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Committee Chairman Tim Johnson and Senator Mike Crapo, the panel's top Republican, announced the agreement after working for months to bridge a partisan divide with the hope of moving legislation this year.
The officials said they were putting finishing touches on a bill they planned to release "in the coming days."
"This agreement moves us closer to ending the five-year status quo and beginning the wind down of Fannie and Freddie, while protecting taxpayers with strong private capital, building the components for a stable secondary market," Crapo said in a statement.
The work by Johnson and Crapo builds off a bipartisan measure previously proposed by Senators Bob Corker of Tennessee and Mark Warner of Virginia. Threading the needle between centrist lawmakers, liberal Democrats and conservative Republicans is a difficult task, and even with heavy involvement from the Obama administration the leaders missed the mark of producing a complete bill.
Under their proposal, Fannie Mae and Freddie Mac would be wound down and replaced with a new government reinsurer. It would mandate private financiers hold a stake and take at least 10 percent of the first losses on mortgage debt. The government would only provide assistance after private creditors had taken a hit.
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Included in the outline is a mandate that strong underwriting standards be built into the new system. It would require a 5 percent downpayment for all but first-time buyers, although that requirement would be phased-in over time. Some consumer and housing advocates worry that a system with rigid down payments will prevent less affluent Americans from accessing credit even if a limited government role is retained.
"There is near unanimous agreement that our current housing finance system is not sustainable in the long-term and reform is necessary to help strengthen and stabilize the economy," said Johnson. "This bipartisan effort will provide the market the certainty it needs, while preserving fair and affordable housing throughout the country."
The outline from the two senators said they plan to "eliminate affordable housing goals" and instead establish housing-related funds to ensure housing is available for all types of borrowers and renters.
Any housing reform plan passed by the Democrat-controlled Senate must also make its way through the Republican-controlled House before it can be signed into law.
Fannie Mae and Freddie Mac were seized by regulators in 2008 as loan defaults drove them toward insolvency, and taxpayers have spent $187.5 billion to keep them afloat. By the end of the month, the duo will have returned $202.9 billion in dividends to taxpayers for the federal bailout.
Industry experts and political analysts do not expect broad housing finance reform to happen before the mid-term elections in November 2014, and probably not until after the next presidential election in 2016.