On Tuesday, Senators Mark Warner (D-VA) and Bob Corker (R-TN) released the details of a highly complicated bill, the Housing Finance Reform and Taxpayer Protection Act, to solve the two biggest problems of the housing market: Fannie Mae – Federal National Mortgage Association (OTCBB:FNMA), and Freddie Mac – Federal Home Loan Mortgage Corp (OTCBB:FMCC).

Fannie Mae

Earlier this month, the senators circulated a draft of the bill. The new legislation proposes to establish an intermediary called Federal Mortgage Insurance Corporation (FMIC), that will operate just like the FDIC. It will receive insurance premiums and be a backstop insurance for people investing in mortgage-backed securities. The bill will also wind down GSE’s.

Fannie Mae and Freddie Mac were put into custody by the Treasury Department almost five years ago. Though the housing market has begun to recover, the private mortgage-backed securities market is still stagnant. Private MBS are the bundles of mortgages that are sold to investors without any government guarantee.

Fannie Mae, Freddie Mac Kept the Housing Market Alive

Joe Nocera of The New York Times says that, contrary to common belief, Fannie Mae/ Federal National Mortgage Association (OTCBB:FNMA) and Freddie Mac/ Federal Home Loan Mortgage Corp (OTCBB:FMCC) have played a crucial role in keeping the housing market alive. They took the credit risk for most mortgages, including the 30-year fixed rate ones. Today, more than 77 percent of the mortgages in the United States are guaranteed by these two firms.

Meanwhile, Republicans have argued that Fannie/ Federal National Mortgage Association (OTCBB:FNMA) and Freddie should be taken out of business, and housing finance be left to the private market. Joe Nocera says that they have a long belief that Fannie Mae and Freddie Mac caused the financial crisis. And now the Corker-Warner bill wants the two companies to be wound down in less than five years.

Winding down the two companies doesn’t mean the private market can take over. Warner told Nocera that the bill would require private markets to absorb the initial 10 percent of any losses. But the federal government will still play a critical role. The Federal Mortgage Insurance Corporation (FMIC) will guarantee any losses beyond that. Warner also told him that the bill will also include programs that will make home ownership easier for low income citizens. That’s what Fannie Mae and Freddie Mac used to do.

Problems With Corker-Warner

Nocera says the biggest problem is the unstated assumption of Corker-Warner. They believe that the 30-year fix rate mortgage is a social entitlement. Hardly any other country offers a 30-year fixed rate mortgage. That time frame is unacceptably risky for the private market. Another troublesome fact is that the 30-year fixed mortgage is the basis of Corker-Warner’s program that would make home ownership easy. What makes the bill even more complicated is that it has to first create a mechanism that can keep the 3-year fixed mortgage viable for such a long period.

Nocera says the country should be debating about whether we should even have a 30-year fixed mortgage. Other debatable questions are whether people who want a 30-year fixed mortgage should rely on a government guarantee or they should pay for it. And whether the government should make it a policy to encourage everybody to own their own home. The debate over Fannie Mae and Freddie Mac is still a sideshow, says Nocera.