Fannie Mae-No Politics (FNMA)

[bmp152]

News: Fannie-Freddie Overhaul Bill Clears Hurdle
Heads of Senate Banking Panel Sketch Outline of Mortgage-Market Overhaul
By Nick Timiraos | 11 Mar, 2014

Our first glimpses of Johnson-Crapo Bill.

http://stream.wsj.com/story/latest-headlines/SS-2-63399/SS-2-477957/

The top Democrat and Republican on the Senate Banking Committee have reached agreement on the broad outlines of a bill to overhaul Fannie Mae and Freddie Mac and the nation’s $9.9 trillion mortgage market.

The bill will call for replacing Fannie and Freddie with a new system of federally insured mortgage securities in which private insurers would be required to take initial losses before any government guarantee would be triggered.

Fannie and Freddie, which were taken over by the U.S. in September 2008, remain one of the largest unaddressed pieces of the government’s financial-crisis rescues.

The agreement between Sens. Tim Johnson (D., S.D.) and Mike Crapo (R., Idaho) follows closely on the work of a proposal released last year by Sens. Bob Corker (R., Tenn.) and Mark Warner (D., Va.).

“There is near unanimous agreement that our current housing-finance system is not sustainable in the long term,” Mr. Johnson said in a statement. The current arrangement, in which Fannie and Freddie are backing nearly three in five new loans while under government control, is “unacceptable,” Mr. Crapo said. Their proposal “provides a balance between providing broad access to mortgages while protecting taxpayers from losses.”

A key question facing committee leaders: Can they attract enough Democratic support, particularly from more liberal members that have insisted on stronger provisions for affordable-housing subsidies, without driving off Republicans that have already reluctantly agreed to a broad government backstop of home loans? Ten members of the banking committee—five Republicans and five Democrats—had supported the Corker-Warner proposal.

Messrs. Johnson and Crapo, who had initially said they hoped to reach agreement by the end of last year, said they plan to release a full draft of their bill within days and to hold a committee vote within weeks. The product follows months of behind-the-scenes negotiations that involved close collaboration between Republican and Democratic committee staffers.

Their proposal faces an uphill battle. An array of industry and consumer interest groups have already signaled they will resist major changes to the nation’s unique system of financing home loans. Lawmakers on both sides of the aisle—though they disagree sharply over the future U.S. role in housing—could also join together to stall a bill.

Still, the prospect of bipartisan legislation would be significant not only because Washington has been gridlocked on other issues such as immigration and the budget, but also because lawmakers have done little to address the fate of the two mortgage-finance giants since their 2008 takeover.

“It would be a huge step forward for them to come forward with a bill,” said Phillip Swagel, who was an assistant secretary for economic policy under Henry Paulson, who was Treasury Secretary when Fannie and Freddie were rescued. He added: “The details are really hard and really important. That’s the tough part.”

The Obama administration has been closely involved in the product, which reflects key principles set forward by President Barack Obamalast August. Last month, current and former White House officials expressed alarm that more progress hadn’t been made.

Their concern is that, as Fannie and Freddie return to profitability and memories of their role in the housing bust have faded, it will become harder to pass measures strong enough to address the problems that triggered their 2008 rescues.

Meanwhile, hedge funds and other institutional investors that have bought up Fannie’s and Freddie’s stock at discounts will fight to ensure that the government doesn’t dispose of the companies in a way that destroy the value of their shares. They could see a huge payday if Fannie and Freddie are restructured as private entities.

While there is widespread agreement that the status quo isn’t tenable, bipartisan agreement has been slow to build. Conservatives have called for a mostly private market, but centrist Republicans and nearly all Democrats have argued that a federal role is needed to preserve broad access to the 30-year fixed-rate mortgage, which isn’t widely available in other countries.

The Senate framework would allow private entities to purchase an explicit government guarantee to cover catastrophic losses on mortgages issued as bonds from a new guarantor, similar to how the Federal Deposit Insurance Corp. regulates banks and provides deposit insurance to minimize bank runs.

Fannie and Freddie don’t make loans but instead buy them from lenders and package them as bonds. Their middleman role makes more widely available the 30-year fixed-rate mortgage by matching banks and other lenders with investors, such as pension funds that are willing to manage the interest-rate risk associated with long-term, fixed-rate mortgages.

Rather than issuing separate securities with a fuzzy implied federal guarantee as Fannie and Freddie did, the new system would see multiple firms issue a common security in which the government would stand behind the payment of principal and interest to security holders. Those firms would have to fail before the government guarantee would kick in.

When the government took over Fannie and Freddie in 2008, it agreed to inject huge amounts of cash to keep them solvent. In exchange, the government has taken nearly $188 billion in shares of “senior preferred” stock.

By the end of March, both companies will have returned nearly $203 billion to the U.S. in the form of dividend payments. Beginning last year, all of their profits are required to go to the Treasury as dividends, making it impossible for them to rebuild capital. The Treasury Department faces multiple lawsuits challenging those terms.

Many investors have bet that the firms will become so profitable that Congress and the administration will have little choice but to let some value flow back to shareholders. Shares of both companies have traded in recent days at their highest levels since the firms were taken over by the government in 2008.

Write to Nick Timiraos at [e-mail]