By Marcy Gordon
AP Business Writer
WASHINGTON (AP) — A plan to phase out government-controlled mortgage giants Fannie Mae and Freddie Mac and instead use mainly private insurers to backstop home loans has advanced in Congress.
The agreement by two key senators and a White House endorsement sent shares of Fannie and Freddie sinking Tuesday. Fannie stock fell $1.79, or more than 30 percent, to $4.03. Freddie dropped $1.48, or 26.8 percent, to $4.04.
The plan by Sen. Tim Johnson, D-S.D., chairman of the Banking Committee, and Sen. Mike Crapo of Idaho, its senior Republican, would create a new government insurance fund.
Investors would pay fees in exchange for insurance on mortgage securities they buy. The government would become a last-resort loan guarantor.
President Barack Obama proposed an overhaul of Fannie and Freddie last year, but Congress has struggled to craft legislation. The government rescued the two mortgage giants at the height of the financial crisis in September 2008 with a $187 billion bailout, which they have repaid.
The senators’ proposal “represents a good-faith compromise,” Bobby Whithorne, a White House spokesman, said in a statement. “We support this effort and believe it is a workable bipartisan approach to complete the biggest remaining piece of post-recession financial reform.”
As the housing market has gradually recovered and made Fannie and Freddie profitable again, they have repaid their government loans as dividends each quarter. Those repayments helped shrink last year’s budget deficit to the smallest gap in five years.
The idea behind the overhaul plan is to shift more mortgage financing risk from the government to the private sector to prevent taxpayers from having to pay for any future bailouts.
“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 economy,” Johnson said in a statement. “This bipartisan effort will provide the market the certainty it needs, while preserving fair and affordable housing throughout the country.”
The Banking Committee is expected to vote on the proposal in coming weeks after Johnson and Crapo draft legislation. The proposal would then be sent to the full Senate.
A fight over the legislation is likely. Most Democrats, and an array of consumer and community groups, tend to favor a continued government role in supporting the mortgage market because they say it stabilizes the housing market. Many House Republicans, especially conservatives, say they want to end government involvement and let the free market rule.
In the House, the Republican chairman of the Financial Services Committee praised Johnson and Crapo “for working hard and producing a reform plan, because the status quo is unacceptable.”
Their plan includes “several common-sense provisions,” said the chairman, Rep. Jeb Hensarling of Texas.
Still, he warned that the window of time for Congress to enact a housing finance overhaul during this legislative session “is rapidly closing.”
Wall Street’s biggest lobbying group, the Securities Industry and Financial Market Association, called the senators’ proposal “a positive development toward achieving the shared goal of establishing a more sustainable housing-finance system.”
The government stepped in in 2008 to rescue Fannie and Freddie as they veered toward collapse under the weight of losses on risky mortgages.
During the housing boom, the two had taken high risks to try to compete with big banks and collect higher profits.
The companies were encouraged by supporters in Congress who portrayed Fannie and Freddie as essential to making home ownership available for more Americans.
Fannie and Freddie don’t directly make loans to borrowers. They buy mortgages from lenders, package them as bonds, guarantee them against default and sell them to investors. That helps make loans available and keeps the housing market running.
Combined, the two companies own or guarantee nearly half of all U.S. mortgages and 90 percent of new ones.
They buy mortgages from lenders, package them as bonds, guarantee them against default and sell them to investors. This system helps free up more money to lend.
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