WASHINGTON — Since it was unveiled a week ago, most of the focus in Senate Banking Committee Chairman Richard Shelby's draft of regulatory relief legislation has been on how it would ease the burden for small institutions and make changes to the Dodd-Frank Act.

But lost in the discussion has been that the draft bill would also significantly revamp the housing finance system and make it easier for lawmakers eventually to wind down Fannie Mae and Freddie Mac.

The bill would not eliminate the government-sponsored enterprises, but instead make several key alterations meant to reduce taxpayer risk posed by the federal conservatorship of the GSEs and enable private capital to play a bigger role in the mortgage market. It essentially borrows the elements from past legislative attempts at housing finance reform that drew consensus, leaving out the most controversial parts.

The Shelby bill is "stealth bipartisan GSE reform," said Karen Shaw Petrou, managing partner of Federal Financial Analytics. "It's masterful."

While Democrats have complained about other parts of the Shelby bill, there has been little to no mention of the measures on GSE reform. That is likely not an accident. The housing finance provisions appear crafted in a way to avoid drawing fire.

The bill avoids discussion about the GSEs' affordable housing activities, the appropriate role of the government in the housing market and Fannie and Freddie's ultimate fate — all divisive subjects in the housing finance debate. Instead it focuses on areas of widespread — though not universal — agreement.

Shelby's proposal would make two major changes to the existing system: allowing private-market access to a common securitization platform, and transferring more risk from the GSEs to the private sector.

The GSEs and their regulator, the Federal Housing Finance Agency, are in the midst of creating a platform to help with the issuance of mortgage-backed securities, but when in place that platform would likely only be available to Fannie and Freddie. But the Shelby bill would change that. It would establish a board of directors to oversee the platform, gradually increasing the number of members that do not work for the GSEs. After five years, the securitization platform would become a nonprofit entity authorized to approve issuances by Fannie and Freddie's competitors.

That is a tidal shift because it would encourage the development of private competition in the secondary mortgage market, which at the moment is dominated by Fannie and Freddie.

"Right now Fannie and Freddie are working on a joint venture that only they can use. Over time, that would only further entrench their duopoly," said Jim Parrot, owner of Falling Creek Advisors and a senior fellow at the Urban Institute. "It would do nothing to help GSE reform. If anything, it might make it harder to pull it off. The Shelby bill would ensure it's a platform that is open to the broader market. By creating this platform, it will help move from this duopoly and to another system that has a lot more participants competing."

To transfer more of the GSEs' risk to the private sector, the bill would require the FHFA to direct the GSEs to "engage in more front-end risk sharing" in which private investors, not Fannie and Freddie, take the first-loss position.

The FHFA is already experimenting with risk-sharing deals and the bill would push the agency further in that direction. At the moment, it is unclear exactly the best way to get private investors to take such a first-loss position, but there are a number of different alternatives that have been contemplated as policymakers have looked at GSE reform. The idea behind the Shelby bill is that by encouraging more experimentation, lawmakers would be better informed about which risk-sharing structures are more efficient if they ever resume debate on broader GSE reform.

The bill would establish minimum annual levels of required risk-sharing that must be increased every year. The FHFA and Treasury would be able to delay those requirements if they determined that more risk-sharing would hurt the housing market.

Over time, the bill would create a system in which private investors held more risk than that held by the GSEs. That is key to reducing the likelihood of taxpayer losses in the future, industry representatives said. Fannie and Freddie, however, would still backstop investors in a crisis environment.

"Having a first loss that takes their risk down to catastrophic risk level removes the taxpayer from being on the bleeding edge of the next crisis," said David Stevens, the president of the Mortgage Bankers Association. "It maintains the full faith and credit of the GSEs, but the GSEs are trading that upfront risk to first-loss providers."

To Petrou, the risk-sharing provision in the Shelby bill is in line with the previous attempt at housing finance reform last year, spearheaded by then-Chairman Tim Johnson, D-S.D., who has since retired, and then-ranking member Mike Crapo, R-Idaho. Their bill, which Shelby voted against, would have eliminated Fannie and Freddie and created a new government agency to provide an explicit guarantee to the market in the event of catastrophic losses.

While the Shelby bill would not eliminate the GSEs, Petrou argues it would effectively make Fannie and Freddie serve as a catastrophic guarantor in the event of major losses. Since Fannie and Freddie are in conservatorship, however, that risk is ultimately still borne by the government, which remains on the hook for any losses.

"It's the intent of Johnson-Crapo, stripped of everything that was a stumbling block," said Petrou. "You wither down Fannie and Freddie into a structure that really approximates the Johnson-Crapo one in all but name."

A Republican committee aide acknowledged that the bill borrowed some elements of the Johnson-Crapo legislation, but said it had influences from other bills, too. Those include House Financial Services Committee Chairman Jeb Hensarling's legislation to fully privatize the GSEs and an alternative offered by Rep. Maxine Waters, the panel's lead Democrat.

The idea behind adding the GSE portions to the regulatory relief bill was to try and move forward on areas of agreement in housing finance while leaving bigger, more contentious issues for later, the aide said.

"What we've done is applicable to a whole host of housing reform alternatives," the aide said. "What we tried to do is advance the ball without biasing it toward any particular housing plan."

The only major players in the debate likely to object to what Shelby is proposing are investors who hold Fannie and Freddie stock. The bill would stop the Treasury Department from selling back its shares of the GSEs without congressional approval, preventing Treasury from recapitalizing Fannie and Freddie and putting them in private hands. Though it would offer the two mortgage companies compensation for their role in building the common securitization platform, investors are likely to object because Shelby's bill paves the way for the eventual dissolution of the GSEs.

Yet that is part of its appeal to industry representatives, who see Shelby's GSE provisions, if they are enacted, as making it far easier to enact a later reform bill.

"This goes a long way to solve some of the core elements," said the MBA's Stevens. "How do we make the GSEs smaller? How do we make taxpayer risk less? This would be a way to put the fuel in the engine that would start this car rolling toward an ultimate solution with a much simpler piece of legislation. It makes the ability to reach a long-term solution much easier."

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