From the WSJ:
Congressional Republicans said Thursday that they would introduce legislation to wind down Fannie Mae and Freddie Mac over five years and cede the companies’ roles to the private mortgage market, which has remained mostly dormant since melting down six years ago.
The bill would create a new utility-like platform for investors to securitize mortgages without a government guarantee, while repealing new curbs on the mortgage-bond market in the Dodd-Frank financial-overhaul bill. It also proposes restricting access to loans backed by the Federal Housing Administration to first-time buyers and moderate-income borrowers.
The measure will face stiff opposition from Democrats and isn’t likely to be considered by the Senate, even if it can pass the House of Representatives. But it nevertheless sets out a marker from which Republicans can begin negotiations on the overhaul of the nation’s $10 trillion mortgage market.
The bill tees up a long-awaited fight over the future of the government’s role in the mortgage market. Fannie and Freddie don’t buy mortgages but instead package them into securities, providing guarantees to investors should the loans default. Their role helped create deep, liquid markets that attracted an array of investors to fund U.S. mortgages, particularly long-term, fixed-rate loans that banks don’t like to hold on their books.
Democrats and some moderate Republicans, along with mortgage investors and the real-estate industry, have argued that some federal guarantees of the mortgage-bond market will be needed to preserve the most popular aspects of the U.S. mortgage market—particularly access to the 30-year, fixed-rate mortgage, a product that isn’t widely offered in most other countries, and the ability to lock in a mortgage rate.
In addition to Fannie and Freddie, the Republican bill proposes several changes to the Federal Housing Administration. The FHA, which has played a key role backstopping mortgages after the private-mortgage market collapsed in 2007, has faced rising defaults and is at heightened risk of exhausting its reserves for the first time in its 79-year history.
The proposal would limit FHA-backed loans to first-time borrowers and to moderate-income borrowers, defined as those who make less than 115% of the area median household income and 150% of the median income in high-cost markets.
The bill would increase down-payment requirements for the FHA, which currently allows a 3.5% minimum down payment, to 5% for non-first-time borrowers. The FHA, which doesn’t make loans but instead backs those that meet its standards, would also be required to reduce the amount of its insurance coverage to 50% over five years.