The US Senate banking committee is expected to act on the Crapo-Johnson proposal to reform Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) this week, but a new proposal from committee members Sherrod Brown (D-OH) and David Vitter (R-LA) shows how big the gulf is between competing visions of America’s mortgage market.

Fannie Mae Freddie Mac FHFA Federal National Mortgage Assctn Fnni Me (FNMA)

Megabanks would have nearly double the capital requirements of regional banks

Support for Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) reform doesn’t split neatly along Democrat-Republican lines, but there is still a divide between two basic interests – those who want to protect taxpayers from another bailout of the secondary mortgage market, and those who want to ensure the survival of affordable, 30-year fixed rate mortgages. The amendment filed by Brown and Vitter would alter an across-the-board capital requirement of 10% of risk-weighted assets with a tiered system that forced larger banks to maintain a higher capital ratio. Under this plan, banks with $500 billion or more in assets would have to meet a new 15% capital requirement, regional and mid-sized banks would have to keep an 8% capital ratio, and community banks would be unaffected.

“If big banks want to continue risky practices, they should do so with their own assets,” wrote Vitter. “Our number one goal is to protect the taxpayers from financial risks and the best way to do this is by implementing a systemic solution, increasing the minimum amount of capital the mega banks are required to have.”

Brown-Vitter meant to reduce impact of too-big-to-fail: Fannie Mae, Freddie Mac

Brown and Vitter argue that megabanks are able to borrow at lower rates of interest because the market believes that too-big-to-fail is alive and well, giving megabanks an assumed government guarantee. This in turn gives regional banks an incentive to consolidate to take advantage of the same assumptions. The idea is that the higher capital requirements will even the playing field in addition to making another collapse less likely, but the effect might simply be that the country’s largest banks stop offering affordable mortgages to the middle class because they can’t get high enough returns. Critics who believe that Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) should be recapitalized and put back to work argue that the recent dip in housing sales is a sign of things to come if Crapo-Johnson or similar legislation becomes law.

Senate Banking Committee Chairman Tim Johnson (D-SD) and ranking Member Mike Crapo (R-ID) are weighing provisions to make their Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) reform proposal more attractive before it goes to the full Senate for a vote (it would be surprising if they couldn’t get the bill out of committee), including a change that would prevent large banks from both originating and guaranteeing the same loans, report Clea Benson and Cheyenne Hopkins for Bloomberg, but the Senators don’t appear to support the Brown-Vitter amendment.