New Proposal to Wind Down Freddie Mac and Fannie Mae Announced

November 11, 2011 (Chris Moore)

A new proposal introduced by Tennessee Senate Republican Bob Corker seeks to responsibly wind down the Government Sponsored Enterprises (GSEs) Freddie Mac and Fannie Mae, effectively ending the government’s involvement in housing finance.

The Residential Mortgage Market Privatization and Standardization Act would gradually reduce the portfolio of mortgage related assets guaranteed by the two GSEs over a ten year period and proposes a new set or rules that brings uniformity and transparency to the housing market allowing private capital to replace Freddie Mac’s and Fannie Mae’s role in housing finance.

GSE reform had been a hot topic earlier in the year with the White House releasing a white paper outlining three different proposals on how to wind down the two GSEs which was met by counter proposals from House Republicans. But since that time, virtually nothing has been done to advance any of the proposals.

“We are no closer to transitioning Fannie Mae and Freddie Mac off government life support than the day the firms were taken under direct government control in 2008,” Sen. Corker said. “We’re introducing this bill to lay down a marker and get a conversation going that Washington has put off for far too long. We must begin the process of responsibly unwinding Fannie and Freddie.”

Perhaps one of the more compelling reasons that a lack of action has been taken by politicians is because with the current strict lending standards being implemented by mortgage lenders, Freddie Mac, Fannie Mae and the Federal Housing Administration have become the backbone of housing finance by insuring about 90 percent of all new home loans.

Highlights of Sen. Corker’s proposal include:

– Requires newly issued mortgage securities that are guaranteed by Freddie Mac and Fannie Mae to be reduced by at least 10 percent per year. Afterwards their mortgage securities will be wholly privatized.

– Creates uniform performance and origination data on mortgages that would be made available to the public through the Federal Housing Finance Agency (FHFA).

– The risk retention requirement would be reduced to a five percent minimum down payment, down from the twenty percent Qualified Residential Mortgage (QRM) requirement currently being proposed through the Dodd-Frank bill.

– Creates a new electronic registration system replacing the current MERS system in which all loans are transferred under one system regulated by FHFA.

– Requires federal regulators to develop streamlined mortgage regulations and uniform practices.

“This legislation gradually reduces the government’s footprint in housing finance, brings added transparency to the mortgage market, and fixes many of the market’s infrastructure problems that have come to light since the financial crisis of 2008. These are sensible steps that can earn back private capital and ultimately get America’s housing market back to fundamentals and away from undo government involvement,” Corker added.

Tags: GSE, Freddie Mac, Fannie Mae, mortgage market, housing finance, mortgage related assets, streamlined mortgage regulations, QRM, mortgage securities