Congress Debates Taking A Step Back From The Mortgage Market Lawmakers are trying to figure out how to scale back the outsize role that mortgage giants Fannie Mae and Freddie Mac play in the housing market. A bipartisan Senate proposal would replace Fannie and Freddie with a scaled-down program, while a Republican House proposal would go even further.
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Congress Debates Taking A Step Back From The Mortgage Market

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Congress Debates Taking A Step Back From The Mortgage Market

Congress Debates Taking A Step Back From The Mortgage Market

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The Senate Banking Committee votes tomorrow on a new head for the agency that oversees mortgage giants Fannie Mae and Freddie Mac. The government took over Fannie and Freddie during the worst of the housing crisis, at a cost to taxpayers of nearly $200 billion. Now that the housing market is recovering, the companies have turned profitable, and they're sending money back to the Treasury.

But many lawmakers remain worried by the government's outsized role in the mortgage market, as NPR's Scott Horsley reports.

SCOTT HORSLEY, BYLINE: Before they were taken over by the government in 2008, Fannie and Freddie operated in a kind of legal limbo. They were for-profit companies, helping to funnel money into the housing market, but they had an implicit guarantee that if they got into trouble, the government would bail them out.

Tennessee Senator Bob Corker says that's a problem.

SENATOR BOB CORKER: I think the thing that almost everybody would say is not an appropriate place to be is where you have private gain and public losses. I mean, this implicit guarantee is incredibly inappropriate.

HORSLEY: Corker, a Republican, and Democratic Senator Mark Warner of Virginia, have crafted a plan to do away with Fannie and Freddie, while handing one of their functions over to a new government agency. That agency would guarantee mortgage-backed securities to keep money flowing into the housing market. But unlike Fannie and Freddie, the new agency would collect a fee for the government's backing.

There are a number of other safeguards designed to protect taxpayers. Homebuyers would have to make at least a five-percent down payment. And the companies issuing mortgage-backed securities would have to hold at least 10 percent capital in reserve. Corker says that's twice as much capital as Fannie and Freddie would have needed to weather the housing crisis without a government bailout.

CORKER: If Fannie and Freddie had had five percent capital, there would have been no taxpayer contributions.

HORSLEY: The Obama administration says it welcomes the bipartisan Senate approach. Meanwhile, House Republicans, led by Jeb Hensarling of Texas, have crafted an alternative bill. It would move the government even further out of the mortgage market, leaving only a limited role for the Federal Housing Administration to help first-time homebuyers and low-income families.

Senator Warner told a gathering at the Bipartisan Policy Center today that House approach is a political non-starter.

SENATOR JEB HENSARLING: You've got Mr. Hensarling's bill over here which is a ideologically pure exercise...


HENSARLING: ...which will never have a single Democrat ever support it.

HORSLEY: Economist Mark Zandi, of Moody's Analytics, says either bill would result in slightly higher interest rates on home loans. But Zandi says that increase would be bigger under the House Republicans' bill, because it would lack a government guarantee.

MARK ZANDI: And more importantly, for most Americans, there probably would be very few 30-year fixed-rate loans out there, at least not for the typical homebuyer. And the other thing to consider is that in really bad times, if the government really didn't step in, it would be pretty tough to get a mortgage loan for anybody at any time.

HORSLEY: House Republicans insist their bill would not end 30-year fixed-rate mortgages. They note such loans are already available for high-priced homes that are too expensive to qualify for a government guarantee.

But Zandi says the experience in other countries suggests that without a government backstop, long-term fixed rate mortgages would not be widely available. He also says it's unrealistic to pretend the government could stay out of the mortgage market altogether.

ZANDI: The reality is that when push comes to shove, if things are really bad the government will step in. So it's important that we all understand that, make that explicit, price for it to make sure that taxpayers don't pay for it in the future.

HORSLEY: These days, it's Fannie and Freddie who are paying taxpayers. The companies have returned $131 billion in dividends to the Treasury so far. Corker argues that's one more reason the government should move quickly to wind down the mortgage giants before lawmakers become too attached to that money and it becomes harder than ever to cut the cord.

Scott Horsley, NPR News, Washington.

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