A bipartisan group of senators led by Sen. Bob Corker, R-Tenn., is drafting legislation designed to reform the housing finance system, including a plan to wind down the government-sponsored enterprises.

The proposal has been deemed by some as an “ambitious solution” to Fannie Mae and Freddie Mac, which were seized by the government in September 2008; it is widely expected to mirror a recent proposal aired by Edward DeMarco, acting director of the Federal Housing Finance Agency.

“Senator Corker is involved in meaningful conversations with his colleagues to develop a sustainable and pragmatic housing finance model that would finally resolve the GSEs, and he is hopeful that we can deal with this issue in the next few months,” said Laura Herzog, a spokeswoman for Corker.

Corker hinted at a Senate Banking Committee hearing in April that his office was collaborating with other lawmakers on a GSE bill that could be in place “very, very soon.”

“Corker confirmed in April that a number of Senate offices were working together on a bill, and I think Corker and [Sen. Mark] Warner in particular, have given strong hints in their most recent hearing on the subject that they are active on the issue and deep enough into the details to have a bias as to the direction they are favoring,” said Jeb Mason, a managing director at the consultancy and research firm the Cypress Group.

Representatives from the offices of Sens. Warner, D-Va., Jon Tester, D-Mont., David Vitter, R-La., confirmed they are working with Corker on GSE reform legislation.

Other Senate Banking Committee members are likely to join the effort as well. Sens. Corker, Warner, Vitter and Elizabeth Warren introduced a bill in March that would prevent the government from using any increase in guarantee fees by Fannie and Freddie to offset government spending. It would also ban the sale of preferred shares of the firms without congressional approval.

The new proposal is expected to build on a suggestion first outlined by DeMarco earlier in May, which called for the creation of a specially-chartered financial institution that would pool capital from shareholders and guarantee principal and interest payments to mortgage-backed securities holders. The model is similar to Fannie and Freddie’s pre-conservatorship model, but would likely swap an implicit guarantee for an explicit one or set up government insurance structures to address certain challenges.

The concept, known as the issuer-guarantor model, could also be supplemented with a structured securities-based model advocated by the Bipartisan Policy Center, according to Karen Shaw Petrou, a managing partner at Federal Financial Analytics.

Ed Mills, a financial policy analyst at FBR Capital Markets and former Hill aide, said there are a lot of lawmakers who are very supportive of DeMarco’s approach, which also comes at a time when there is growing consensus on both sides of the need for housing finance reform.

“I would expect if there is something introduced, it would track very similarly to what Ed DeMarco is putting into place,” said Mills. “All are coalescing around some of the similar ideas of preserving the government’s role, preserving the government’s guarantee, but transferring a lot of the credit risk from the entity that is providing that guarantee to a form of private capital, or mortgage insurance, or direct infusement of people being willing to guarantee principal interest rate risk.”

DeMarco has already taken some steps toward GSE reform, though there is a limit on what the FHFA can do on its own. He is pushing Fannie and Freddie to create a unified back office that would establish a standardized securitization platform which could be spun off into its own entity. That would maintain the infrastructure of Fannie and Freddie, but pave the way for more substantive reforms by Congress.

“Ed DeMarco is teeing up GSE reform for Congress,” said Mills. “It will take a few years, but once he’s done the hard work, Congress will absolutely step in and complete the final few steps of this reform process.”
For now, it seems senators are keen to find ways to implement DeMarco’s vision legislatively.

In a note to clients, Federal Financial Analytics said the draft bill would likely impose stricter regulations on any mortgage-backed guarantors that are structured as cooperatives. It would likely provide the issuer guarantors with an explicit government backstop, similar to the Federal Deposit Insurance Corp. and be paid for through premiums to the government. It would also layer in risk tranches ahead of the government’s catastrophic-risk guarantee, which means that the government would pay only after all the tranches are played through, rather than serving as an upfront payout to investors.

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