Fannie-Freddie Plan Unveiled as House Takes Fresh Stab at Reform

(Bloomberg) -- It’s been 10 years since the U.S. government took control of mortgage giants Fannie Mae and Freddie Mac during the depths of the financial crisis -- an anniversary some lawmakers used to promote their plans for overhauling the nation’s housing-finance system.

House Financial Services Chairman Jeb Hensarling unveiled a proposal Thursday that would effectively shutter Fannie and Freddie. Their roles would be replaced by enabling private companies and Ginnie Mae to backstop the trillions of dollars of mortgage-securities that underpin the U.S. housing market. Ginnie is a government corporation that guarantees mortgage bonds.

The bill outline is probably one of Hensarling’s last acts in Congress as the Texas Republican isn’t seeking re-election in November. It’s one of the few Fannie-Freddie proposals that’s emerged on Capitol Hill that can be called bipartisan, as Maryland Democrat and presidential candidate John Delaney is cosponsoring the legislation.

“What this bill does is put in place a framework for keeping the government guarantee in place but ensuring that more private capital is introduced into the market," Delaney told reporters Thursday in a joint press conference with Hensarling and Jim Himes, a Connecticut Democrat who’s also cosponsoring the bill.

Slim Prospects

While Congress has long struggled to figure out what to do with Fannie and Freddie, the legislation still has slim prospects of advancing during an election year, especially in the Senate where lawmakers are bogged down by more high-profile issues. But Hensarling and Delaney said they are hopeful their plan will serve as a road map lawmakers can use to push for changes in the next Congress.

Fannie and Freddie don’t issue mortgages. Instead, they buy loans from lenders, wrap them into securities and make guarantees to investors in case borrowers default. The process frees up cash for lenders to underwrite more mortgages.

Hensarling’s proposal would replace the role of Fannie and Freddie with private guarantors, who would take on some of the credit risk from mortgage securities. Ginnie Mae would be granted authority to guarantee mortgage bonds. Taxpayers would only be on the hook if losses were catastrophic.

The plan adopts some of the approaches outlined in a Milken Institute proposal developed by Edward DeMarco, who previously ran the Federal Housing Finance Agency, and Michael Bright, who worked on an ill-fated reform plan in 2014 as a staffer to Republican Senator Bob Corker.

Affordable Housing

Delaney said the legislation seeks to preserve affordable-housing programs and consumer protections -- a key factor to winning support going forward. But Cowen analyst Jaret Seiberg questioned that assertion. In a Thursday note to clients, he said among his early impressions of the bill are that it would “substantially” curb affordable-housing requirements.

If Congress doesn’t act swiftly, Hensarling said he would expect the next leader of the FHFA -- Fannie and Freddie’s regulator -- to implement aspects of his plan. The Trump administration will get a chance to replace FHFA Director Mel Watt, a Barack Obama appointee, in January when his term expires.

“If we reach gridlock here, the status quo is unacceptable," Hensarling said. “But if I can’t have a legislative solution I want something that is going to be done to dramatically reduce systemic risk and taxpayer exposure.”

Hensarling’s proposal would leave little money for Fannie and Freddie shareholders, which will likely displease hedge funds and other investors who are suing the government to claim a portion of the companies’ earnings.

©2018 Bloomberg L.P.