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April 23, 2014

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Plan would protect taxpayers from any future housing meltdown

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ASSOCIATED PRESS

A for sale sign stands outside a bank-owned home in North Las Vegas, Feb. 18, 2009.

Updated Tuesday, June 25, 2013 | 3:24 p.m.

Dean Heller

Dean Heller

WASHINGTON — A bipartisan group of senators on Tuesday proposed an overhaul to the housing finance system that would gradually eliminate Fannie Mae and Freddie Mac, the two government-sponsored mortgage guarantee giants, and shift more mortgage and credit risk to the private sector.

Eight lawmakers from the Senate Banking Committee — a group of four Democrats and four Republicans that includes Nevada Sen. Dean Heller— said their legislation would protect taxpayers from bearing the costs of housing market downturns as occurred in the 2008 financial crisis when Fannie and Freddie were nationalized and bailed out with $187 billion in taxpayer-funded loans.

“Much of the difficulty Nevadans are facing today can be traced back to the collapse of the housing market,” Heller said. “My state and Americans across the country cannot wait any longer for Congress to finally tackle a major contributing factor to the 2008 economic downturn.”

Sens. Bob Corker, R-Tenn., and Mark Warner, D-Va., spearheaded the effort to revamp the mortgage market system, calling housing finance "the last piece of unfinished business remaining after the 2008 economic meltdown."

"All these years later, nothing has changed," said Sen. Bob Corker, R-Tenn., "It's time to end this failed model."

Sen. Mark Warner, D-Va., who with Corker spearheaded the effort to revamp the mortgage market system, said housing finance was "the last piece of unfinished business remaining after the 2008 economic meltdown."

White House spokeswoman Amy Brundage said President Barack Obama welcomed the bipartisan effort led by the two senators. "The president strongly supports comprehensive housing finance reform that would forever end Fannie Mae and Freddie Mac's flawed business model that put the American taxpayers on the hook."

The legislation would create a new Federal Mortgage Insurance Corporation that would provide backstop insurance available only after a substantial amount of private capital is used up.

Fannie and Freddie currently own or guarantee half of all U.S. mortgages and back nearly 90 percent of new ones. With the revival of the housing market, the two enterprises have returned to profitability, with profits returning to the government. Fannie and Freddie don't directly make loans, but buy mortgages from lenders, package them as bonds, guarantee them against default and sell them to investors.

The legislation would wind down Fannie and Freddie operations within five years and require that every mortgage-backed security issued through the new FMIC will have a private investor bearing the first risk of loss and holding at least 10 percent in equity capital for every dollar at risk.

Housing goals which have forced the two government-sponsored enterprises to assure that loans go to those below the median income level would be eliminated, replaced by a market access fund for affordable housing that would be paid for through a user fee.

It would also take measures to ensure that smaller community banks and credit unions would not be squeezed out by the mega-banks in competing for the a share of the secondary mortgage market.

Corker said the Banking Committee was already working on legislation to overhaul the Federal Housing Administration, a government agency that insures housing loans by banks, and said it was a goal to move on the Fannie-Freddie legislation by this fall.

The Bipartisan Policy Center's Housing Commission, chaired by former Sens. George Mitchell, D-Maine, and Christopher "Kit" Bond, R-Mo., and former Housing and Urban Development secretaries Mel Martinez and Henry Cisneros, commended the senators for introducing the bill and said it was similar to their plan to create a new system that encourages private capital to play a greater role in bearing mortgage-credit risk.

The Securities Industry and Financial Markets Association (SIFMA) said "the time to address the future of mortgage finance is overdue, and we agree with the fundamental premise that private capital must play a larger role than it does in today's market."

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  1. For real? This what these privileged morons think the problem is Fannie and Freddie? Just when I think you can get any more disgusted with what the Government let these huge criminal banks get away with, they find a way to make me sicker. Like everything else this protects rich people. There is class warfare and the rich are winning.

  2. I disagree Scott Miller. The government should never be in the business of guaranteeing loans in the first place. When it does, it only leads to waste and corruption.

    Let the banks handle loans on their own terms.

  3. Actually with fannie and Freddie out of the way. Who will provide liquidity, The reason I say that the banks are limited on how much money they have. For example If you have $1 Million dollars and you make 10 loans for $100 Thousand then your now out of business. Where before the banks could make loans and then sell those loans hence creating liquidity.

    Also the article said the Government made loans to Fannie Mae, And Freddie Mac which means the Government will make money in this and the tax payer would not lose. The user fee could be added now to all loans it would do the same thing.
    Keep in mind that AIG, Bank of America, Goldman Saks are not Government entities and they got Bail out money too. So how does changing this keep taxpayer money out of it. Because they will be deemed to big to fail and it would cause a crash like before.
    I actually think had our Government helped Bear Stearns this whole thing could have been avoided. Because it was going to go down like domino's. Which is why The first Bail out happened!