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Fannie, Freddie Say Overhaul Would Boost Mortgage Rates
Companies Outline Concerns on Senate Bill to Replace Them

By NICK TIMIRAOS
April 25, 2014 4:58 p.m. ET

http://online.wsj.com/news/articles/SB10001424052702304788404579524093755984248

Ahead of a key Senate committee vote scheduled for next week on a bill to replace Fannie Mae FNMA -3.76% and Freddie Mac, FMCC -2.26% the companies outlined concerns about the bill in detailed memos distributed to lawmakers on Friday.

Fannie and Freddie, which were taken over by the U.S. in 2008, haven't been allowed to lobby. But the Treasury Department, which injected nearly $188 billion to keep the companies afloat, asked the companies to provide technical input on the Senate bill, which the White House supports.

The Senate bill would wind down Fannie and Freddie over a transition period of at least five years, replacing the firms with a new system in which private companies could package mortgages into securities that would be federally insured. Private capital would be required to take initial losses.

The companies raised a series of concerns in the letters Friday, including that the proposed capital requirements and design of the new system could sharply raise borrowing costs, particularly for borrowers without great credit or large down payments. They also provided specific recommendations that attempt to reduce potential hurdles.

Freddie estimates that mortgage rates under the legislation could rise by as little as 0.1 percentage points and as much as 2 percentage points. Fannie estimates rates could rise by as little as 0.5 percentage points and as high as 1.4 percentage points.

"There is no question that…mortgage rates would increase under the bill because of the increased capital requirements" for any successors to the firms, Freddie said in its memo. "The question is by how much." Borrowers with weaker credit and little down payment "may lose the ability to obtain mortgage credit," the memo said.

Another concern: that the companies would be tasked with managing an "unprecedentedly long transition period" in which retaining and attracting staff to manage some $5 trillion in mortgage guarantees would grow more difficult, said Freddie CEO Donald Layton in a letter to the firm's regulator.

"The 'degree of difficulty' for Freddie Mac to continue its core policy function through the transition period is extremely high," he wrote. "The risk of departures crippling the company's ability to operate is very real and very significant." The letter outlined a series of specific changes that he said could reduce those risks.

The Senate Banking Committee is set to begin next Tuesday considering amendments to the bipartisan legislation, introduced last month by Sens. Tim Johnson (D., S.D.) and Mike Crapo (R., Idaho), who head the committee. A vote could happen as soon as Tuesday.

Write to Nick Timiraos at [e-mail]