WASHINGTON — Congressional efforts to shut down bailed-out Fannie Mae and Freddie Mac took a significant step forward with bipartisan agreement from key senators on a plan to overhaul the housing finance system.
The proposal released Tuesday would slowly shrink the companies and replace them with a scaled-back government guarantee for mortgages. Details are expected to be disclosed in the coming days.
Fannie Mae and Freddie Mac, which together own or guarantee about 60% of existing mortgages, were seized by the federal government in 2008 as they neared bankruptcy from bad loans they guaranteed during the subprime housing boom.
Senate Banking Committee leaders reached agreement after hearings last year on how to overhaul the complex housing system and reduce the role of the federal government in backing home loans, said Chairman Tim Johnson (D-S.D.) and the panel’s top Republican, Michael D. Crapo of Idaho.
The two threw their political weight behind an existing bipartisan bill to replace Fannie and Freddie, which they said would largely serve as the base for detailed legislation they still were drafting.
They agreed on five principles, including protecting taxpayers from the cost of a housing downturn, promoting a stable mortgage market and maintaining the availability of affordable 30-year fixed-rate mortgages.
Johnson and Crapo also will make some changes to the earlier bill that would help first-time home buyers and those in high-priced areas such as Southern California.
Since the global financial crisis in 2008, the U.S. government, through Fannie, Freddie and the Federal Housing Administration, has backed about 90% of all new mortgages.
“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,” Johnson said.
The White House praised the announcement as “a good-faith compromise.”
“We support this effort and believe it is a workable bipartisan approach to complete the biggest remaining piece of post-recession financial reform,” White House spokesman Bobby Whithorne said.
Although there is strong bipartisan agreement that Fannie and Freddie should be shut down and the housing finance system overhauled, Democrats and Republicans remain at odds about how to do it.
The proposal from Johnson and Crapo builds on bipartisan legislation unveiled last year by Sens. Mark R. Warner (D-Va.) and Bob Corker (R-Tenn.).
That bill, which has five Democratic and five Republican cosponsors on the Senate Banking Committee, would try to reduce future risk to taxpayers from a housing downturn by requiring banks and other private firms that package mortgages into securities to hold at least 10 cents in capital for every dollar of the underlying loans to cover the first wave of losses.
A centerpiece of that plan would be a new agency, the Federal Mortgage Insurance Corp., that would collect fees from the industry and pay to cover losses on mortgage securities after the 10% private capital behind the securities was paid out.
Johnson and Crapo endorsed the idea of the new agency but also said they would make some changes to the earlier bill.
One key change would be to keep in place higher loan limits for government-guaranteed mortgages in pricey markets. Warner and Corker wanted to reduce the current limit, which is as high as $625,500 in Southern California and other high-cost markets, to the standard $417,000 in place for most of the nation.
Johnson and Crapo also want to reduce a proposed 5% minimum-down-payment requirement to 3.5% for first-time home buyers.
Warner and Corker said they were pleased that the overhaul process was moving forward. And the Financial Services Roundtable, which represents large banks, called the principles from Johnson and Crapo “a positive step toward needed reform.”
But House Republicans want to take a different approach. A bill passed by the House Financial Services Committee would gradually close Fannie and Freddie over five years but would not replace their role with any new government mortgage guarantee. That job would be left to the private sector.
Rep. Scott Garrett (R-N.J.), a key supporter of that bill, said he was pleased that the Senate was moving on the issue but believed that the House approach was the right one.
“The federal government’s domination of the housing finance market has left taxpayers on the hook for trillions in mortgage guarantees,” Garrett said.
To many, Fannie and Freddie became key symbols of the financial crisis. The government pumped a total of $187.5 billion into the two companies to keep them afloat since seizing them.
But the rebound in the housing market has turned their finances around. Both companies are profitable, and their first-quarter dividend payments will bring the total amount they have sent the Treasury to $204.9 billion, fully offsetting the government bailout’s cost.