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by Jann Swanson
Senate Bill to Abolish Fannie and Freddie Hits the Floor

A bill to abolish the two government sponsored enterprises (GSEs) Freddie Mac and Fannie Mae will finally be introduced today after months of preparation. Although not widely believed to be passable in its current form, any iteration is likely to be significant for the housing market. As it sits, the bill would replace the GSEs with a reinsurer of mortgage-backed securities (MBS) to act as a backstop to private capital in a crisis.

The legislation will be proposed by a bipartisan group of senators led by Bob Corker (R-TN) and Mark Warner (D-VA). It would liquidate the two GSEs, which have been in government conservatorship since 2008, within five years., replacing them with a reinsurer, tentatively named the Federal Mortgage Insurance Corporation. It is designed to insure a liquid mortgage market would exist even in times of crisis while protecting taxpayers from loses. The reinsurance would kick in only after private creditors had absorbed a 10 percent loss of the principal balance of the affected mortgage-backed securities should the loans go bad.

Reuters reports that analysts were calling the legislation a first step that faces an uphill battle in Congress, especially in the House where some members want the government completely out of the housing finance business. The news agency quotes Jaret Seiberg, a senior policy analyst at Guggenheim Securities, who said that there "is almost zero chance the bill introduced today will be adopted" as it is currently written.

The bill would require private entities to buy mortgages from lenders and issue them to investors as securities, according to the discussion draft. Private equity would be required to absorb a 10 percent loss of the principal underlying those new mortgage-backed securities if the loans went bad.

...read more at Mortgage News Daily

mortgage news daily