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Mortgage Crisis Watch Business and legal issues affecting: loan repurchases | mortgage-backed securities | mortgage insurance

New Bill Poised to Revamp Fannie Mae, Freddie Mac

Following months of negotiations that involved collaboration between Republicans and Democrats, Senators Tim Johnson (D-SD) and Mike Crapo (R-ID) announced Tuesday that the Senate Banking Committee had reached an agreement on the framework to revamp Fannie Mae and Freddie Mac. Since the financial meltdown, the future of the agencies has largely remained uncertain. A full draft of the bill is scheduled to be released within days followed by a committee vote shortly thereafter.

“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 and avoiding repeating the mistakes of the past,” said Crapo of Idaho, co-author of the bill.

“There is near unanimous agreement that our current housing-finance system is not sustainable in the long term,” Sen. Johnson stated. The new measure attempts to strike a balance between providing broad access to mortgages while protecting taxpayers from losses.

As with previous attempts to replace Fannie and Freddie, the new bill was met with strong support and input from President Obama. Bobby Whithorne, a White House spokesman, commended legislators for reaching a “good-faith compromise” where “both sides made difficult concessions.” As Whithorne emphasized, there can be no question that housing finance remains the biggest remaining piece of post-recession financial reform.

Features of the New Proposal

The new bill authored by Senators Johnson and Crapo is based on a similar bipartisan bill introduced last July by Senators Mark Warner and Bob Corker, with few additions. Notably, the Johnson-Crapo measure has proposed specific benchmarks for a transition to the new housing finance system.

In an attempt to spread risk, the new bill will make private interests responsible for the first 10 percent of loss incurred on defaulted mortgage loans. Under the new housing finance system, most borrowers would be required to make down payments of at least 5 percent. Protecting the coveted 30 year-fixed mortgage and incorporating stronger provisions for affordable housing subsidies have been sticking points for Democrats.

Remaining Hurdles

Crapo and Johnson had been under pressure to introduce the bill in enough time this year to wade through what is sure to be a tumultuous legislative process. It is yet to be determined whether the bill can garner enough Democratic support, specifically from those who continue to push for affordable housing subsidies. The most recent bill proposed by Senators Corker and Warner was supported by five Republicans and five Democrats on the banking committee.

Many in Washington have feared that, with the return of Fannie and Freddie to profitability and with the passage of time dulling memories of their prominent role in the financial crisis, it will be harder to pass meaningful reform. Consumer interest groups and institutional investors are wary about a major overhaul of the housing giants.

We are hopeful that any new legislation would lead to a dramatic reduction of mortgage loan repurchase demands made on correspondent lenders. The new legislative impetus is a promising signal that housing reform may be imminent.