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Lawmakers' plans to overhaul Fannie and Freddie come into focus

Joe Light, Bloomberg News on

Published in Home and Consumer News

WASHINGTON -- Lawmakers have a long way to go before resolving the biggest remaining quagmire from the 2008 financial crisis. But a consensus is now forming around principles for overhauling Fannie Mae, Freddie Mac and the U.S. mortgage-finance system.

Sens. Bob Corker and Mark Warner have been working on a bill for months, and they intend to start sharing ideas and legislative text with other senators and the Trump administration in the coming weeks, said people familiar with the matter.

Their plan would preserve Fannie and Freddie but take steps to make it easier for investors or other companies to create competitors, the people said. The two lawmakers want to introduce a bill by early next year.

Such a move would begin what's sure to be a drawn out and contentious process to address one of the most critical components of the U.S. economy. Fannie and Freddie provide the grease for the housing market by guaranteeing nearly $5 trillion in mortgage bonds. Reforming the companies will likely have broad implications for consumers' borrowing costs and the availability of home loans.

"Reforming our nation's housing finance system is the last major piece of unfinished business of the financial crisis," Corker, a Tennessee Republican, said in a Wednesday statement to Bloomberg. "We are engaged in productive discussions with our colleagues, the administration, and a number of stakeholders on the best path forward."

The new effort comes as a key Republican lawmaker, House Financial Services Chairman Jeb Hensarling of Texas, said Wednesday he's open to a government guarantee on some mortgage bonds. In a speech at an event in Washington, Hensarling said he still didn't like the government having wide involvement in mortgage bonds but grasps the political reality that reform probably would not progress without one. That move from Hensarling, who previously disavowed any government guarantee, could make some Democrats more open to proceeding with an overhaul.

 

Fannie and Freddie were taken over by the government in 2008 and eventually received $187.5 billion in bailout money after the housing market cratered. Lawmakers and regulators initially said their fates would be resolved quickly, but instead the companies have been stuck in government control for more than nine years.

Fannie and Freddie are a central component of the U.S. mortgage market, buying loans from lenders, wrapping them into securities and making guarantees to investors in case borrowers default. That process frees up cash for lenders to make more mortgages.

Before the crisis, in part because they were chartered by the federal government, investors believed the bonds they issued carried an "implied" government guarantee if Fannie and Freddie themselves went under.

Many lawmakers derided that situation, asserting that the system meant that private Fannie-Freddie investors made money in good times, while the government had to bail them out in bad times. Many of the Fannie-Freddie reform plans that have been released since have sought to address that issue, though none have gotten enough traction to become law.

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