Leaders of the Senate Banking Committee unveiled a bipartisan plan on Tuesday that would wind down Fannie Mae and Freddie Mac, and replace them with a hybrid public-private mortgage-finance system. The government-sponsored enterprises were bailed out by taxpayers in 2008, at a cost of $187 billion as the housing market crashed. Fannie and Freddie guarantee mortgages and issue mortgage-backed securities, and back well over half of new mortgages right now.
The new plan would shut Fannie and Freddie down—presumably over several years—and create a new government entity just to guarantee mortgages. Private sector firms would bundle those mortgages into securities and market them to investors.
“There’s no question it would be a boom for large financial institutions,” said Guy Cecala, publisher of Inside Mortgage Finance. “Mostly banks that would take over that activity and, to some extent, that risk.”
The first 10 percent of losses from guaranteed mortgages would be absorbed by private financiers, not the government. That’s to protect taxpayers from another bailout.
But Cecala is skeptical: “Just like we couldn’t afford to let Fannie Mae and Freddie Mac fail, the question is, would we be able to allow large banks to fail, if they were propping up the mortgage market by issuing government-guaranteed mortgage securities?”