Congress Considers Bill to Wind Down GSEs

A house resolution (HR) currently under consideration in Congress details the timeline to take the government-sponsored enterprises (GSEs) out of conservatorship and eventually wind down Fannie Mae (FNM) and Freddie Mac (FRE). However, even if passed in current form, as sponsored by Jeb Hensarling (R-TX), the bill will still contain provisions that may prevent the GSE from going totally out of business. If passed, the “GSE Bailout Elimination and Taxpayer Protection Act” — HR 4889 — directs the director of the Federal Housing Finance Agency (FHFA) to remove the GSEs from conservatorship two years after the bill is signed into law. Three years after that, the bill would revoke the charters for both entities and establish a 10-year-long wind down of the entities. During that 10-year period, the FHFA director and the Treasury secretary would be responsible for imposing regulations that would divest the GSEs of their holdings. The bill is currently under consideration in the House Financial Services Committee and comes on the heels of a Senate that approved the Restoring American Financial Stability Act. That bill calls for the end to government ownership of the GSEs by the end of 2011. The Senate and House versions of the bill are currently being reconciled before a final bill can be sent for presidential signature. The bill gives the FHFA director discretion to not take the GSEs out of conservatorship if the director determines the financial markets would be adversely affected by not maintaining conservatorship. In addition, the director cannot take the GSEs out of conservatorship if any of the conditions for receivership still exist. Those conditions are outlined in the Federal Housing Enterprises Financial Safety and Soundness Act of 1992. The house resolution would also amend the 1992 legislation and repeal GSE housing goals. When the 1992 law passed, it established HUD-imposed housing goals for financing of affordable housing and housing in central cities and other rural and underserved areas, according to Fannie Mae’s website. Those goals would be repealed. The bill is written in such a way that one GSE could be taken out of conservatorship, while the second remains. But once a GSE is out of conservatorship, the bill restricts the dollar amount of mortgage assets each enterprise can hold. When the GSEs exit conservatorship, each one is limited to holding $850bn in mortgage assets. During the following year, the GSEs must reduce mortgage assets to $700bn. In year two, assets must be reduced to $500bn. Three years after exiting conservatorship, each GSE will be limited to holding $250bn in mortgage assets, if the bill becomes law. There are also other additional provisions in the bill. One requires the FHFA director to set minimum capital levels for the GSEs. Another repeals the increased conforming loan limit and prohibits the GSEs from purchasing mortgages that exceed the median area home price for the market where the house is located. The bill also sets down payment requirements for homebuyers. When the GSEs exit conservatorship, the bill requires borrowers to make a 5% down payment. One year later, it increases to 7.5% and after two years out of conservatorship, the bill requires borrowers make a 10% down payment. Write to Austin Kilgore. The author held no relevant investments.

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