The proposal from Corker and Warner, a Virginia Democrat, would attempt to address that central quandary. It would put an explicit guarantee from the federal government on mortgage bonds issued under the new system, provided by Ginnie Mae for a fee. Ginnie, which is a government-owned corporation, already provides such a guarantee for mortgage bonds containing loans backed by the Federal Housing Administration and other agencies.
Fannie, Freddie and any new competitors would be required to have enough capital to pass stress tests, similar to what the government mandates for big banks. The companies also would be encouraged to offload some of the risk they take on to private investors, which Fannie and Freddie already do to some extent. Behind that backstop would be yet another layer of protection: a new government fund, meant to protect taxpayers in the event of a mortgage-finance company failing.
Senate Banking Committee Chairman Mike Crapo, an Idaho Republican, a few other senators and some members of the Trump administration have been kept abreast of the broad strokes of what Corker and Warren are working on.
Corker in an interview said that the goal of his and Warner's plan will be to keep rates and the mortgage system unchanged for borrowers, while increasing taxpayer protection and competition in the secondary-mortgage market.
Under the proposal, preferred shareholders of Fannie and Freddie could be made whole or close to it, depending on the final outlines of the transition, the people said. But common shareholders may not fare as well, they said. Whether and how shareholders get compensated in the transition to the new system is still an open question. Investors in the companies include several prominent hedge funds.
This isn't the first time Corker and Warner have tried to deal with Fannie and Freddie. A few years ago, the pair helped author legislation that would have wound down the companies and replaced them with an entirely new system. That bill foundered after opposition from some affordable housing advocates and small lenders.
"One of the lessons I learned from the last Corker-Warner effort was that our proposal was too complex, and didn't do enough on affordability," Warner said in a statement. "So what we're looking for now is a viable simplified approach that protects the taxpayer, preserves the 30-year fixed mortgage, and includes robust access and affordability provisions."
The new plan would require Fannie, Freddie and the other guarantors to offer small lenders access to the mortgage system on equal terms to large lenders, the people said. Corker and Warner are attempting to work with affordable housing advocates and more progressive senators to ensure mortgages are available to low-income borrowers, the people said.
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