Senators to Present Bill to End GSEs

Investor Update: On June 25, Bloomberg.com published an article titled Senators to Offer Bill to End Fannie Mae, Freddie Mac.

Please click here for prior reporting.  Following is the aforementioned article.

Senators to Offer Bill to End Fannie Mae, Freddie Mac

A bipartisan group of senators is planning to introduce a proposal today for replacing U.S.-owned mortgage financiers Fannie Mae (FNMA) and Freddie Mac (FMCC) with a newly created government reinsurer.

The bill to be offered by Senators Bob Corker and Mark Warner reflects a prevailing view among lawmakers that the two government-sponsored enterprises should cease to exist while a federal role in backing mortgage lending should remain. Corker, a Tennessee Republican, and Warner, a Virginia Democrat, have set a news conference for 2:15 p.m. to introduce the measure.

The senators have revised the proposal from an earlier version to reduce the losses that lenders would take on bad mortgages during a financial crisis, according to a draft copy of the revised 154-page bill that was obtained yesterday.

“There is a bipartisan effort here that’s thoughtful and it is without question the most thorough Congressional effort to draft a GSE reform legislation to date,” David Stevens, president and chief executive officers of the Mortgage Bankers Association, said in an interview.

The proposal could restart a stalled debate over the future of the U.S. mortgage-finance system. Congress has yet to propose a measure for replacing Fannie Mae and Freddie Mac, which have operated under U.S. conservatorship since they were seized by regulators during the 2008 credit crisis. President Barack Obama’s administration also hasn’t provided a plan for revamping the government’s role in housing finance.

‘Uphill Fight’
“It’s an uphill fight for this legislation, but the window is more open now than it has been at any point since the crisis,” said Jaret Seiberg, an analyst at Guggenheim Securities LLC’s Washington Research Group. “There seems to be a growing desire on both sides of the Hill to do something.”

According to the latest draft, Washington-based Fannie Mae and McLean, Virginia-based Freddie Mac would be liquidated within five years. The two companies package mortgages into securities on which they guarantee 100 percent payment of principal and interest on underlying mortgages.

“Taxpayers will become whole based on what we’re doing if it passes the way that it is and then taxpayers will know that in the future we won’t have a system where there’s private gains and public losses,” Corker said today in an interview with Betty Liu on Bloomberg Television.

‘First-Loss’ Provision
The draft bill calls for private financiers to take a loss of 10 percent of the principal of underlying securities. Housing finance participants who have seen the draft have been critical of that “first-loss” provision, as it is referred to in the draft, saying it is too big a change from the current system.

Fannie Mae and Freddie Mac would be replaced by a Federal Mortgage Insurance Corp. that would continue efforts to build a common securitization platform to help small lenders issue securities. It also would continue the two companies’ existing multifamily guarantees.

The new corporation would be allowed to cover a greater share of the losses in an “unusual and exigent circumstance” that threatens the mortgage credit availability and the housing finance system, according to the draft. Such assistance would be limited to six months once every three years.

That provision “gives investors more comfort than under the prior version of the bill where they might have been more skittish,” Clifford Rossi, a former Citigroup Inc. risk manager and managing director who’s now at the University of Maryland’s Robert H. Smith School of Business.

The draft measure also would exempt securities covered by the new entity from qualified residential mortgage rules that six banking regulators including the Federal Deposit Insurance Corp. and the Federal Reserve are trying to complete this year.

Retaining Risk
The QRM rule would require banks to hold a slice of mortgage backed securities that they sell to investors. The banks complained in 2011 when regulators released a preliminary draft calling for lenders to keep a stake in mortgages with down payments of less than 20 percent and in those issued to borrowers spending more than 36 percent of their income on debt.

Fannie Mae and Freddie Mac have begun posting record profits after drawing a total of $187.5 billion in aid from taxpayers to stay afloat since 2008. Heartened by the change of fortune, hedge funds including Paulson & Co. Inc. and Claren Road Asset Management LLC have been buying shares of the companies’ junior preferred stock and urging lawmakers to drop plans for abolishing them.

In 2011, the Treasury Department released a discussion draft with three options for restructuring housing finance. The Obama administration has yet to send a detailed plan or preference to lawmakers

Other Bills
Senator Jack Reed, a Rhode Island Democrat, is also working on a bill to recast housing finance. Senate Banking Committee Chairman Tim Johnson, a South Dakota Democrat, and Senator Mike Crapo of Idaho, the panel’s top Republican, have said they prefer to work on legislation to revamp the Federal Housing Administration before a Fannie Mae and Freddie Mac bill.

Representative Jeb Hensarling, the Texas Republican who leads the House Financial Services Committee Chairman, is completing work on a broad housing finance bill that would include changes to FHA and a replacement for Fannie Mae and Freddie Mac.

Hensarling has indicated that he prefers a privatized system without a government backstop. His bill could be introduced before lawmakers leave for their summer recess in August. Any final law is expected to take at least several years to pass.

‘Big Decisions’
“That approach in Corker-Warner is going to be the approach that eventually becomes law,” Seiberg said. “The battle is going to be how do get there, how do you structure it and what do you do with Fannie and Freddie. And those are really big decisions that are likely to take longer than this Congress to resolve.”

The bill’s cosponsors include senators Mike Johanns, a Nebraska Republican; Jon Tester, a Montana Democrat; Dean Heller, a Nevada Republican; Heidi Heitkamp, a North Dakota Democrat; Jerry Moran, a Kansas Republican; and Kay Hagan, a North Carolina Democrat.

To view the online article, please click here.

About Safeguard 
Safeguard Properties is the largest mortgage field services company in the U.S. Founded in 1990 by Robert Klein and based in Valley View, Ohio, the company inspects and maintains defaulted and foreclosed properties for mortgage servicers, lenders,  and other financial institutions. Safeguard employs approximately 1,700 people, in addition to a network of thousands of contractors nationally. Website: www.safeguardproperties.com.

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