Earlier this month, a bipartisan bill was put forth that would liquidate Fannie Mae and Freddie Mac and replace them with a government reinsurer of mortgage securities behind private capital. While the legislation is in the very early stages, there is mounting concern over how it might impact the real estate and mortgage industries.
According to the draft of the bill, Washington-based Fannie Mae and McLean, Va.-based Freddie Mac would be liquidated within five years and the U.S. Treasury would assume responsibility for their existing mortgage guarantees.
The bill is a reflection of a growing consensus in Washington that the U.S role in mortgage finance should be limited to assuming risk only in catastrophic circumstances, explains a June 4 report from Bloomberg News. It also reflects the prevailing view among lawmakers that the two government sponsored enterprises should cease to exist.
Exactly what kind of impact the dissolution of Fannie and Freddie would have on the real estate business remains to be seen, says Berkshire Hathaway HomeServices President Stephen Phillips.
“I think it’s clearly a question of how you would go about doing away with them and what you would replace them with,” says Phillips. “What’s being discussed is not simply liquidation, but a replacement with something different, designed to perform the same function on an aggregate economic basis. But it’s a matter of how you get there from here.”
As the real estate market moves steadily forward in its nascent recovery, there is some concern that upheaval in Washington could derail the progress that’s being made.
“Given the fact that the housing recovery – which is extremely important to the recovery of the overall economy – is still relatively new, it’s important that anything that’s done in terms of Fannie and Freddie is done very carefully to avoid a reduction in activity around housing, which would have the potential of harming the overall recovery,” says Phillips.
According to Mortgageorb.com, the draft bill explains that a new reinsurance agency would be named the Federal Mortgage Insurance Corp. “Part of its role would be to continue with the current effort to develop a common securitization platform – as well as to enact new measures to help small lenders issue securities” (mortgageorb.com, June 6, 2013).
According to Reuters, under the proposed legislation, the U.S. Treasury would assume responsibility for Fannie and Freddie’s existing mortgage guarantees. The two government-sponsored enterprises have recently begun to report record profits after receiving more than $180 billion in aid from U.S. taxpayers during the peak of the housing demise. If and when Fannie and Freddie are liquidated, proceeds would first go to the U.S. government—the primary shareholder—and then to holders of junior preferred shares, followed by holders of the common shares.
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