Two U.S. senators working on a bipartisan overhaul of Fannie Mae and Freddie Mac are seriously considering a plan that would break up the mortgage-finance giants, according to people with knowledge of the matter.
The proposal by Tennessee Republican Bob Corker and Virginia Democrat Mark Warner would attempt to foster competition in the secondary mortgage market, where loans are packaged into bonds and sold off to investors, said the people.
Corker and Warner’s push to develop a plan marks Congress’ latest attempt to figure out what to do with Fannie and Freddie, an issue that has vexed lawmakers ever since the government took control of the companies in 2008 as the housing market cratered. The lawmakers’ plan is still being developed, and a Senate aide who asked not to be named cautioned that no decisions had been made on any issues.
The stakes of changing the housing-finance system are enormous. Fannie and Freddie underpin much of the mortgage market by buying loans from lenders, wrapping them into securities and providing guarantees in case borrowers default. Together, the companies back more than $4 trillion in securities.
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One long-stated desire for some politicians on both sides of the aisle has been to end Fannie and Freddie’s duopoly, partly due to concerns that their size encourages taxpayer rescues if they run into trouble. After seizing the companies nine years ago, the government injected $187.5 billion into them.
To lower the barriers to entry, lawmakers and regulators have suggested letting private competitors use some of Fannie and Freddie’s infrastructure, such as the intellectual property the companies use to securitize mortgages or the data they rely on to determine whether one loan is riskier than another.
Corker and Warner started their work earlier this year, with their aides holding meetings with industry groups and former government officials to discuss ideas. The lawmakers are members of the Senate Banking Committee, which held a hearing on housing finance last month and has scheduled another for June 29. Banking Committee Chairman Mike Crapo and Sherrod Brown, the panel’s top Democrat, would likely take the lead on any housing-finance legislation with Corker and Warner’s input.
Among the ideas Corker and Warner have considered is splitting Fannie and Freddie’s single-family businesses from their multifamily businesses, which finance apartment rentals, said people familiar with their work. The single-family businesses could then be split again into even smaller companies, said the people who spoke on the condition of anonymity because the senators’ discussions are private.
Warner said last week at a Mortgage Bankers Association conference that he and Corker had found consensus on a number of issues, including developing a system that preserves the 30-year mortgage. He said that the senators had found a desire for more competition in the single-family business but that competition might not be as necessary in the companies’ multifamily business.
After the speech, Warner told reporters that the senators had ideas to create more single-family competition that were “definitive” but wouldn’t elaborate on what those ideas are. In an email, Warner spokesman Kevin Hall said, “one concept we are exploring includes how to promote competition in the single family market and maintain broad access to credit by removing barriers to entry.”
Corker, in a statement, said “there continues to be strong, bipartisan consensus in Congress that we must act to reform our nation’s housing finance system and protect taxpayers from future economic downturns.” He added that a broad range of senators have been involved in discussions.
Breaking up Fannie and Freddie would face logistical hurdles. In the past, business separations in other industries have sometimes fallen along regional lines, but that might not work for mortgage companies whose viability depends on a broad geographic footprint. Other issues a bill might have to address include how to split up employees, intellectual property and what would happen to the guarantees the companies issue on mortgage-backed securities during any transition.
Corker and Warner’s legislative push also faces other uncertainties. While the banking committee is focused on Fannie and Freddie, the broader Senate is backed up on bigger priorities, such as health care and tax policy. Treasury Secretary Steven Mnuchin has said that Fannie and Freddie will be a focus during the second half of the year.
Compass Point Research & Trading policy analyst Isaac Boltansky recently wrote that he believed there is only a 10 percent chance of lawmakers passing housing-finance legislation before 2019, down from a probability of 30 percent he predicted earlier.
There’s also no guarantee that Corker, Warner and the other senators can build a broad enough coalition. Some affordable housing advocates fear that any legislation that could pass muster with the House GOP will curtail access to home ownership for low and moderate-income borrowers. Some small lender groups, on the other hand, fear the push for more competition will result in large banks taking more control of the secondary mortgage market.
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