By Margaret Chadbourn
WASHINGTON (Reuters) - U.S. House Republicans on Thursday unveiled draft legislation that would wind down mortgage finance companies Fannie Mae and Freddie Mac over a five-year period and sharply reduce the government's role in the market.
The sweeping proposal aims to establish a new framework for the U.S. housing finance system, a group of Republicans on the House of Representatives Financial Services Committee told reporters. The bill would also revamp the Federal Housing Administration, partly by raising down payments on FHA-backed loans and limiting the pool of eligible buyers.
"We have to take a holistic approach," the panel's chairman, Texas Republican Jeb Hensarling, told reporters. He said his goal is to limit taxpayer risk and replace the current system where "the federal government has almost a virtual monopoly."
Fannie Mae and Freddie Mac, which own or guarantee about half of all new U.S. home loans, were seized by the government in 2008 as souring loans pushed them to the brink of collapse.
The companies buy mortgages from lenders and repackage them into securities for investors, which they issue with a guarantee. They were propped up with $187.5 billion in taxpayer funds, but have since returned to profitability and have paid about $132 billion in dividends to taxpayers.
The new proposal would replace the companies with a non-profit, utility-like platform that investors would use to securitize mortgages without a government guarantee, essentially replacing the business model that has been a staple of the 30-year fixed rate mortgage.
The draft bill is an opening gambit in a fight with Democrats over the future of the nation's $10 trillion mortgage market that will likely be waged for years.
Republicans, who control the House, blame Fannie Mae and Freddie for helping to inflate the housing bubble, and they are eager to reduce the government's involvement and make sure taxpayers are never again on the hook for losses.
Democrats, who lead the Senate, agree Fannie Mae and Freddie Mac should be shuttered, but they want to maintain some sort of government backstop for the mortgage market.
Jaret Seiberg, a senior policy analyst at Guggenheim Securities, said removing the government guarantee would drive mortgage costs higher and lock some potential buyers out of the market.
"The odds are very much against this bill becoming law. Not only is the housing lobby influential, but voters care about their ability to get mortgages and purchase homes," he said.
Last month, a bipartisan group of lawmakers in the Senate introduced a bill that would abolish Fannie and Freddie within five years and replace them with a new "public guarantor." The bill would still maintain a federal role in the market.
FHA DOWNPAYMENTS WOULD RISE
In addition to the new securitization platform, the Republican measure would create a legislative framework and regulatory structure for so-called covered bonds, which would be backed by mortgages but which would remain on the issuer's balance sheet, unlike the mortgage-backed securities issued by Fannie Mae and Freddie Mac.
The lawmakers also included language to repeal a requirement under the Dodd-Frank Wall Street reform law, known as the "qualified residential mortgage" rule that will set risk-retention standards. It would also delay the implementation of the so-called qualified mortgage rule, which requires lenders to verify borrowers' ability to repay their loans and offers legal shields for lenders who follow certain guidelines.
They also proposed several changes to reform the Federal Housing Administration. The FHA, which insures about a third of all U.S. mortgages, has faced mounting losses from defaults on mortgages it guaranteed from 2007-09 as the housing bubble deflated and may soon exhaust its cash reserves.
The bill, which the lawmakers plan to move through the House Financial Services Committee before the August recess, would increase down payment requirements for FHA loans from the current 3.5 percent minimum up to 5 percent for certain borrowers.
The FHA does not make loans itself, but offers private lenders guarantees against homeowner default.
Only first-time buyers and moderate-income borrowers would be eligible for FHA-backed loans under the bill. FHA loans are often taken out by those who cannot qualify under the stricter down-payment and credit-score requirements of Fannie Mae or Freddie Mac.
Hensarling is shepherding the bill, which is cosponsored by Republican Representatives Scott Garrett of New Jersey, Randy Neugebauer of Texas, and Shelley Moore Capito of West Virginia.
(Reporting by Margaret Chadbourn; Editing by Vicki Allen, Kenneth Barry and Chizu Nomiyama)