WASHINGTON A bipartisan group of senators will introduce a bill later today that would wind down Fannie Mae and Freddie Mac and replace them with a government reinsurer of mortgage securities that would backstop private capital in a crisis.
Under the bill, the two companies would be liquidated within five years and government reinsurance would kick in only once private creditors had shouldered large losses. The system is designed to ensure a liquid mortgage market even in times of crisis, while protecting taxpayers from losses.
A new guarantor, called the Federal Mortgage Insurance Corp., would replace Fannie Mae and Freddie Mac.
The bill is sure to be opposed by credit unions, which insist small mortgage lenders need a government-backed entity to buy residential mortgages and to package them for sale on the secondary market in order to compete in the mortgage market with the giant banks.
The two government sponsored enterprises have been run under federal conservatorship since September 2008 and have absorbed almost $190 billion in taxpayer-funded assistance since then.
The bill would require private entities to buy mortgages from lenders and issue them to investors as securities. Private equity would be required to absorb a 10% loss of the principal underlying those new mortgage-backed securities if the loans went bad.
It would charge and collect fees designed to cover both its operating costs and to maintain a catastrophic fund. It would also continue existing efforts to build a common securitization platform to help smaller lenders issue securities.
