WASHINGTON (Reuters) — A draft bill to
wind down government-run mortgage financiers Fannie Mae <FNMA.OB>
and Freddie Mac <FMCC.OB>, released by two leading U.S. senators on
Sunday, would leave a decision on how to treat their private
shareholders to the courts.
The 442-page draft from the Democratic chairman of the Senate
Banking Committee and the panel's top Republican would keep in place
current terms of the government's bailout of the two companies that
require them to sweep all their profits into the U.S. Treasury.
It is silent on whether or not private shareholders should share in
any proceeds when the companies are liquidated.
Fannie Mae and Freddie Mac, the two leading sources of U.S. mortgage
funds, were seized by the government during the financial crisis in
2008 and propped up with $187.5 billion in taxpayer funds. In
return, the government got a controlling stake in the companies.
They have since returned to profitability and by the end of March
will have sent the Treasury $202.9 billion in dividends.
Private investors, including Perry Capital and Fairholme Capital
Management, have sued over the bailout terms. They argue they should
stand to benefit from the profits given that the companies soon will
have paid more in dividends to taxpayers than they received in aid.
Fannie Mae and Freddie Mac help ensure the mortgage market stays
liquid by buying loans from lenders and repackaging them as
securities that they sell to investors with a guarantee. Since the
government seized the firms, that guarantee has explicit government
backing.
The bill, written by Democrat Tim Johnson and Republican Mike Crapo,
would replace the companies with a new industry-financed agency. The
agency would provide a government backstop, but it would only kick
in after private creditors took a hit.
It would aim to shutter the companies over five years, although that
deadline could be extended multiple times if a replacement system
was not ready.
"This proposal includes an explicit government guarantee in order to
add stability to the economy, keep costs reasonable for borrowers
and renters, and ensure fair access to the secondary market for all
lenders," said Johnson.
The absence of any provision to compensate private investors shows
both a reluctance to interfere with the existing litigation and a
concern over the potential for introducing provisions that could be
subject to legal challenges.
The shares of the two so-called government-sponsored enterprises
went on a two-day downward slide after Johnson and Crapo announced
on Tuesday they had reached a deal on a bill. They recovered some of
those losses later in the week.
"In a liquidation of any big corporation you would always pay out
debt-holders and shareholders with any leftover proceeds," said Tim
Pagliara, chief executive officer of CapWealth Advisors, a wealth
management firm whose clients own some 8 million shares. "This
(bill) attempts to legislate what happens to Fannie, Freddie
shareholders."
The two senators labored intensively to produce a bill that could be
enacted this year. But the odds of the legislation clearing Congress
are slim, even if they can get the bill through their committee,
which itself is uncertain.
With mid-term elections approaching in November, lawmakers are
likely to turn their attention to the campaign trail within a few
months, leaving little time to deal with the complex issue of
revamping the U.S. housing finance system.
In addition, Senate Majority Leader Harry Reid, who controls the
agenda in the chamber, appears cool to the legislation.
"It's not a thing that Reid wants to do," said a Senate Democratic
aide familiar with the issue. "A lot of Democrats disagree with the
content of the proposal."
The plan would set up a new federal regulator, called the Federal
Mortgage Insurance Corporation, to provide the mortgage guarantee
and help regulate the housing system.
While the bill would abolish affordable housing goals Congress set
for Fannie Mae and Freddie Mac, it would establish funds to finance
rental properties and provide incentives for lenders to serve
lower-income borrowers. The funds would be financed by industry
fees.
It would create a single platform for the securitization of
mortgages, and establish a system to ensure small mortgage lenders
are not shut out by larger competitors.
Some of the banking panel's more liberal members have yet to sign
off on the framework of the bill. Without their support, Reid would
be even more hesitant to bring it up for a vote.
Even if it did clear the Senate, prospects for passage in the
Republican-controlled House of Representatives are slim.
Representative Jeb Hensarling, the Texas Republican who leads the
House Financial Services Committee, has spearheaded work on a
separate bill that would more sharply reduce the government's role.
(Additional reporting by Richard Cowan;
editing by Chris Reese and Eric Walsh)
