Fannie Mae and Freddie Mac would be put through receivership and turned into lender-owned insurers under a housing-finance overhaul plan co-authored by the companies' former regulator.
Ginnie Mae, a U.S.-owned corporation that guarantees payment on mortgage bonds, would be placed at the center of the housing-finance system under the Milken Institute proposal developed by Edward DeMarco, who ran the Federal Housing Finance Agency for more than four years, and Michael Bright, who worked on an ill-fated reform plan in 2014 while serving on Sen. Bob Corker's staff.
DeMarco and Bright want to see Fannie Mae and Freddie Mac converted into mutual companies, owned by lenders, that would sell insurance against defaults instead of buying and securitizing mortgages. As they do now with Federal Housing Administration loans to less-wealthy borrowers, the lenders would issue mortgage-backed securities under the auspices of Ginnie Mae. As an exception, Fannie Mae and Freddie Mac could still buy loans directly from small lenders, the authors said.
"This can become, in my view, a credible conservative, right of center approach to housing-finance reform," said Michael Stegman, who stepped down as President Obama's housing-finance point man earlier this year and will soon join the Bipartisan Policy Center.
While few expect new housing-finance legislation to emerge before the U.S. presidential election in November, stakeholders have begun to lay the groundwork for a potential push in the next administration. Earlier this year, authors including advisers to Democrat Hillary Clinton's campaign proposed merging Fannie Mae and Freddie Mac into a new government-owned corporation.
In contrast, DeMarco and Bright hold more sway with conservative lawmakers, and their plan could be a starting point if Republicans keep control of Congress makes a new push on reform.
The government took control of Fannie Mae and Freddie Mac in 2008, eventually injecting them with $187.5 billion in bailout money. At the time, many lawmakers expected the companies would quickly be wound down, but nearly eight years later Congress is still far from agreement on what kind of system, if anything, should take the companies' place.
Significant Impact
DeMarco and Bright said they don't expect their plan would have a significant impact on mortgage rates and that the new system would have between 5% and 10% capital to absorb potential losses before drawing on taxpayers.
They don't say how they would address the roadblocks that stymied earlier legislative efforts, including the 2014 bill that was abandoned amid Democrats' objections to eliminating affordable housing goals. Progressive groups have fought to preserve the commitments to facilitate lending for certain lower-income borrowers, while some conservatives blame them for lax lending standards before the credit crisis.
DeMarco and Bright said that they don't yet know how their system would replace the affordable housing goals and that they will seek input in coming months. That may not be enough to please progressives, who criticized DeMarco for not doing enough to help struggling borrowers when he headed FHFA.
Progress Unlikely
John Taylor, president of the National Community Reinvestment Coalition, said he doesn't believe it would be possible for legislation preserving the affordable housing goals to make it through the Republican-controlled Congress.
"I wish it was, but it's not," he said.
Without such a possibility, Taylor said, his group would prefer that Fannie Mae and Freddie Mac be preserved in their current form.
The plan is also likely displease private shareholders suing the government to claim a portion of the companies’ profits. The government since 2012 has taken nearly all the companies' profits when they make them, and the DeMarco-Bright plan would leave little money for them.
