Senators Orrin Hatch (R-UT) and John McCain (R-AZ) introduced legislation today “to permanently end government support for Fannie Mae and Freddie Mac,” according to a press release from Hatch’s office.
The two government-sponsored enterprises (GSEs) backed highly-risky mortgages to people who could not afford them with taxpayer guarantees. When the real estate bubble burst in 2008 with more and more Americans defaulted on their mortgages, Fannie and Freddie collapsed and were subsequently propped up with taxpayer dollars and then put into federal conservatorship.
According to the release, the GSE Bailout Elimination and Taxpayer Protection Act:
- Establishes a finite end to the GSEs’ conservatorship 2 years from the date of enactment.
- Immediately implements several fundamental GSE reforms to protect taxpayers:
- Repeals of the GSEs’ misguided affordable housing goals mandate and the Affordable Housing Trust Fund;
- Starts shrinking the size of the GSEs by capping their maximum portfolio size at $700 billion and gradually reducing that cap to $250 billion over five years;
- Reduces the GSEs’ market share by returning the conforming loan limit to its pre-housing crisis standard limit of $417,000;
- Increased guarantee fees (‘G-Fees’), to eliminate the GSEs’ competitive advantage and bring more private capital into the market; and
- A prohibition on any reduction to the senior preferred stock dividends the GSEs contractually agreed to pay taxpayers under their conservatorship.
- Upon the end of the conservatorship, the Federal Housing Finance Agency (FHFA) must evaluate the financial viability of each GSE. If it is determined not to be viable, the FHFA would follow the procedure laid out by the Housing and Economic Recovery Act of 2008 (P.L. 110-289) for placing that GSE into receivership.
- If determined to be viable, the GSE would be allowed to resume limited market operations under its own control for a maximum of three (3) years, with the following new rules:
- Enhanced authority for FHFA to adjust the minimum capital requirements for the GSEs as appropriate, mirroring the existing capital adequacy requirements other regulators already have in place for banks (12 U.S.C. 3907);
- A minimum down payment requirement of at least 5 percent for all new loans, increasing to 7.5 percent in the second year and 10 percent by the third year, to increase the quality of all loans touched by the GSEs;
- Repeal of the GSEs’ exemption from having to pay state and local taxes, to remove one of the distinct advantages of being a GSE; and
- Repeal of the exemption allowing GSE securities to avoid full SEC registration.
- At the end of that 3 year period, each GSE’s charter expires. At that point, Fannie and Freddie must conduct all new operations as fully private sector companies competing on a level playing field without any government advantages.
- Provides for the orderly wind down of any legacy business commitments post-charter expiration over a 10 year period following the model successfully used in the Sallie Mae transition from GSE to a private company (P.L. 104-208)
Congressman Jeb Hensarling (R-TX) also joined the Senators in announcing this measure today.