New bipartisan legislation that would reform the mortgage market was introduced by Representatives Gary Peters (D-MI) and John Campbell (R-CA) last week.

Fannie and Freddie were put under government conservatorship in 2008 in order the avoid the agencies insolvency.  Since that time, they have drawn more than $150 billion from the treasury, and the Obama Administration has promised unlimited access to funds to backstop their losses.

The proposed legislation allows the FHFA to create private Housing Finance Guaranty Associations (HFGAs) that would essentially buy mortgages and package them into mortgage backed securities (which is basically what Fannie and Freddie do/did).  These associations would issue securities comprised of conventional mortgages with loan-to-value rations of 80 percent or less.  Mortgages without down payments of less than 20% could be purchased by the associations only if the originator/seller kept a 10 percent stake in the mortgage and agrees to a repurchase agreement.  The bill would force Fannie and Freddie to reduce their portfolios to less than $250 billion within five years.

The key differences between the new plan and the old Fannie/Freddie model are that the new mortgage backed securities would be explicitly rather than implicitly guaranteed by the government.  The HFGAs would pay into an insurance pool that is supposed to protect the taxpayers from losses (along with the increased risk retention risks).  In many ways this bill is a compromise between those who would entirely do away with Fannie and Freddie, and those who believe the housing market would grind to a halt without government support.

We shall see if this bill has any chance of gaining traction in the Congress.

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