A draft that could wind Fannie Mae / Federal National Mortgage Association (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) over five years was presented on Thursday in the House of Representatives by a group of Republicans. Apart from winding down mortgage finance giants draft also calls for taking away the mortgage securitization process from government and restructure Federal Housing Administration, says a report from Reuters.
Republican members of the House Financial Services Committee told reporters that the main objective of the proposal is to create new guidelines for the housing finance system and along with it reduce the government interference in the market.
It’s time to change
Yesterday, Sens. Mark Warner (D-Va.) and Bob Corker (R-Tenn.) told that they are optimistic that the Senate Banking Committee will consider their bill aimed at reforming the housing finance system, says a report from TheHill.
“[Our bill] gets government out of the business of pricing credit,” Corker said on the Senate floor. “And it modernizes mortgage backed securities.”
Their bill, named Housing Finance Reform and Taxpayer Protection Act, if passed could substitute Fannie Mae / Federal National Mortgage Association (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC). This will ensure that the government stays away from the business of mortgage lending as they don’t want profits “to serve as a piggy bank for any of our colleagues pet projects.”
According to Warner, it’s been five years since the crisis and the time is apt to change the system, “status quo is just not sustainable.” The time is apt as the housing market is showing signs of recovery.
The U.S. authorities, after the financial crisis, gave around $200 billion to support the housing lending market which further fueled the 2008 meltdown. The senators believe that housing finance reform is essential as the same was not covered under the Dodd-Frank financial reform law.
Five year transition phase to replace Fannie Freddie
As per the bill, there will be a five-year transition period to replace Fannie Mae / Federal National Mortgage Association (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) by a new Federal Mortgage Insurance Corporation. Private firms that securitize pools of qualifying mortgages will be allowed to purchase insurance from the new entity, to cover up to 90 percent of the losses. Private financers will be encouraged from this move to manage their risk more efficiently as now only 10 percent of their own capital will be at risk.