Key senators agree on plan to replace Fannie Mae, Freddie Mac

WASHINGTON -- Congressional efforts to shut down bailed-out Fannie Mae and Freddie Mac took a significant step forward Tuesday as key senators announced bipartisan agreement on a plan to overhaul the housing finance system.

The proposal, which will be detailed in the coming days, would slowly shrink the companies and replace them with a scaled-back government guarantee for mortgages.

Fannie Mae and Freddie Mac were seized by the federal government in 2008 as they neared bankruptcy from bad loans they guaranteed during the subprime housing boom.

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Senate Banking Committee Chairman Tim Johnson (D-S.D.), and the panel’s top Republican, Mike Crapo of Idaho, said they had reached agreement after a series of hearings last year on how to overhaul the complex housing system and reduce the role of the federal government in backing home loans.

Since the 2008 financial crisis, Fannie, Freddie and the Federal Housing Administration have 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 the economy,” Johnson said as he and Crapo released the principles they had agreed should be part of legislation.

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,” said White House spokesman Bobby Whithorne.

While 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 exactly to do it.

The proposal from Johnson and Crapo builds on bipartisan legislation unveiled last year by Sens. Mark Warner (D-Va.) and Bob Corker (R-Tenn.)

That bill, which has five Democratic and five Republican cosponsors on the 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 on mortgage securities after the 10% private capital behind the securities was paid out.

Johnson and Crapo endorsed the idea of the new agency.

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 the Senate was moving on the issue but believed 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.

Fannie and Freddie have become symbols of the financial crisis and the government has pumped a total of $187.5 billion into the two companies to keep them afloat since 2008.

But the rebound in the housing market has turned their finances around. Both companies are profitable and when first-quarter dividend payments are made will have sent the Treasury $204.9 billion, fully offsetting the government bailout’s cost.