WASHINGTON - A bipartisan group of senators Tuesday proposed an overhaul to the housing finance system that would gradually eliminate Fannie Mae and Freddie Mac, the two government-sponsored mortgage guarantee giants, and shift more mortgage and credit risk to the private sector.
Eight lawmakers from the Senate Banking Committee -- four Democrats and four Republicans -- said their legislation would protect taxpayers from bearing the costs of housing market downturns as occurred in the 2008 financial crisis when Fannie and Freddie were nationalized and bailed out with $187 billion in taxpayer-funded loans.
"All these years later, nothing has changed," said Sen. Bob Corker (R-Tenn). "It's time to end this failed model."
Sen. Mark Warner (D-Va.), who with Corker spearheaded the effort to revamp the mortgage market system, said housing finance was "the last piece of unfinished business remaining after the 2008 economic meltdown."
White House spokeswoman Amy Brundage said President Barack Obama welcomed the bipartisan effort led by the two senators. "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."
The legislation would create a new Federal Mortgage Insurance Corporation that would provide backstop insurance available only after a substantial amount of private capital is used up.
Fannie and Freddie currently own or guarantee half of all U.S. mortgages and back nearly 90 percent of new ones. With the revival of the housing market, the two enterprises have returned to profitability, with profits returning to the government. Fannie and Freddie don't directly make loans, but buy mortgages from lenders, package them as bonds, guarantee them against default and sell them to investors.
The legislation would wind down Fannie and Freddie operations within five years and require that every mortgage-backed security issued through the new FMIC will have a private investor bearing the first risk of loss and holding at least 10 percent in equity capital for every dollar at risk.
Corker said the Banking Committee was already working on legislation to overhaul the Federal Housing Administration, a government agency that insures housing loans by banks, and said it was a goal to move on the Fannie-Freddie legislation by this fall.