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House GOP Unveils Bills To Speed Closure of Fannie, Freddie

May 19th, 2011 2:44 PM by Lehel S.

House GOP Unveils Bills To Speed Closure of Fannie, Freddie

By Alan Zibel

U.S. House lawmakers unveiled seven bills Friday to speed up the eventual closure of government-controlled mortgage giants Fannie Mae (FNMA: 0.38, -0.01, -2.05%) and Freddie Mac (FMCC: 0.40, +0.00, +0.88%), part of a Republican push to dramatically reduce the U.S. government's role in the mortgage market.

The bills are part of a GOP strategy to keep public attention on Fannie and Freddie, the two mortgage giants whose government takeover in fall 2008 has cost taxpayers about $138 billion so far.

Republicans, especially in the House, want to unwind the government's longstanding backing of the $10.5 trillion U.S. mortgage market, arguing that the high levels of support that have traditionally been part of American housing policy pose too much of a risk for future bailouts. "We never want to find ourselves in the situation we're in ever again," said Rep. Scott Garrett (R., N.J.) at a briefing with reporters. Garrett said he was encouraged by a meeting held earlier between GOP lawmakers and Treasury Secretary Timothy Geithner, and Housing and Urban Development Secretary Shaun Donovan.

The Obama administration, he noted, shares Republicans' goal of diminishing government support for housing. "They are on the same page as we are," he said.

Republicans face intense resistance, however, from powerful interests such as Realtors and community bankers, who have been lobbying on Capitol Hill to maintain a strong federal role. The Senate, meanwhile, has shown little inclination to take up the issue anytime soon.

Fannie and Freddie buy loans and repackage them for sale to investors as securities, offering guarantees to make investors whole if borrowers default. They were placed in federal control in September 2008 after rising mortgage losses wiped out their thin capital cushions.

The GOP bills add to eight that were passed by a House subcommittee last month. They restore a cap on the amount of taxpayer aid the two companies can receive, ensure there is no new federal replacement for Fannie and Freddie if the two are put into receivership and bar the government from lowering the 10% annual dividend paid by the two companies.

Others would require Fannie and Freddie to sell or place into the public domain "non-mission critical" assets such as patents and data, subject the two companies to the Freedom of Information Act, and limit payments of legal fees for Fannie and Freddie executives.

Finally, a bill would abolish an affordable housing trust fund that was created in 2008. It was supposed to be funded by profits from Fannie and Freddie, but never got going as the companies' fortunes turned downward.

The Republican bill to cap taxpayer aid to Fannie and Freddie, while likely a politically popular move, could rattle the market for mortgage securities. That's because investors in securities issued by Fannie and Freddie have been operating under the assumption that the government will live up to a December 2009 pledge to provide unlimited aid to Fannie and Freddie through 2012.

Since investors assumed that the U.S. government stands behind Fannie and Freddie, they are willing to purchase securities issued by the two companies and consider them nearly as safe as Treasury debt. But restoring caps on aid to Fannie and Freddie would throw the government's support into question.

"The market would have a difficult time trading if that legislation passed the House," said Jim Vogel, a debt analyst at FTN Financial.

The GOP bills' sponsors are: Rep. Jason Chaffetz (R., Utah); Rep. Michael Fitzpatrick (R., Pa.); Rep. Robert Hurt (R., Va.); Rep. Randy Neugebauer (R., Texas); Rep. Don Manzullo (R., Ill.); Rep. Ed Royce (R., Calif.) and Rep. Steve Stivers (R., Ohio).

While many Republicans favor limiting the federal role in the housing market as much as possible, others are taking a more moderate position.

Earlier this week, Rep. John Campbell (R., Calif.) and Rep. Gary Peters (D., Mich.) unveiled legislation that would replace Fannie and Freddie with at least five private companies that would issue mortgage-backed securities with the explicit guarantee of the federal government. Their proposal mirrors plans advanced by industry groups such as the Financial Services Roundtable's Housing Policy Council and Mortgage Bankers Association.

Such legislation could pass Congress in several years, as it ensures that low-cost mortgages will be available to consumers, wrote Jaret Seiberg, financial policy analyst at MF Global's Washington Research Group, in a note to clients.

Garrett, however, said this approach would be too similar to the structure of Fannie and Freddie. "We don't want to go back to where we came from," he said.

Posted in:General
Posted by Lehel S. on May 19th, 2011 2:44 PM



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