An outline of legislation to dissolve Fannie Mae and Freddie Mac, the two government-backed lending giants, was chalked out Tuesday by the Senate Banking Committee.
Sen. Tim Johnson (D-S.D.), chairman of the committee, and Sen. Mike Crapo (R-Idaho), a top panelist, announced that the committee had arrived at certain points and hopes to introduce a bill soon. Once the bill is ready, they will have a panel vote on it, reports Reuters.
A few key points of the proposed bill include:
1. The first 10 percent of any mortgage losses will be borne by private interests before the government interferes.
2. Fannie Mae and Freddie Mac will be replaced with a single government entity, "Federal Mortgage Insurance Corp," which will be funded by user fees. The entity will insure bonds only after private lenders fail to do so.
3. The bill is also urging for stronger "loan underwriting standards," in which first-time buyers have to make a 5 percent down payment.
"There is near unanimous agreement that our current housing finance system is not sustainable in the long term and reform is necessary to help strengthen and stabilize the economy. This bipartisan effort will provide the market the certainty it needs," Johnson said in a statement.
"This agreement moves us closer to ending the five-year status quo and beginning the wind down of Fannie and Freddie, while protecting taxpayers with strong private capital," Crapo added.
However, The Wall Street Journal speculates that the bill may not get a full senate vote as the house is divided largely on maintaining a government backup for the home loan market.
"Whether it's called Fannie and Freddie or reconstituted as something else, it's clear we need a government guarantee," Kevin Brown, president of the California Association of Realtors, told the Journal. Congress is unlikely to take up the bill either with November's midterm elections approaching.
The news of the legislation reflected badly on Fannie's and Freddie's shares as stocks fell 31 percent and 27 percent respectively on Tuesday's closing trade.
The administration has been speculating over the future of Fannie Mae and Freddie Mac since 2011. The current pitch is based on a prior proposal by Sen. Bob Corker (R-Tenn.) and Mark. R. Warner (D-Va.), who suggested forming a single entity to replace the two lending giants.
Fannie and Freddie were bailed out by the government when the housing market crashed in 2007, receiving aid of around $170 billion. The two firms have been profitable since the housing market recovery. According to Value Walk, the government expects to rake in a profit of more than $179 million from Fannie and Freddie over the next 10 years if the ownership remains unchanged.
