Top Democrat's Mortgage Reform: A Lender-Owned Co-op

Maxine Waters
APRep. Maxine Waters

By Margaret Chadbourn

The top Democrat on the U.S. House Financial Services Committee on Thursday introduced a draft proposal to abolish Fannie Mae and Freddie Mac and create a new lender-owned cooperative that would issue government-backed loans. Rep. Maxine Waters of California outlined a measure that challenges the more conservative approach of the panel's chairman. Texas Republican Jeb Hensarling's proposal would sharply reduce the government's role in housing finance.

The counterproposal is unlikely to gain broad support in the Republican-led House. "Fannie Mae and Freddie Mac's return to profitability and repayment of taxpayer dollars has led some to rightly speculate whether (they) need any reform at all," Waters said in a statement. "I am hopeful that%VIRTUAL-pullquote-It creates an explicit government guarantee, paid for by the industry and used to capitalize an insurance fund that is tapped in times of financial crisis.% this legislation will continue to move the conversation on housing finance reform forward."

The House bill maintains a clear government role is needed to sustain the popular 30-year, fixed-rate mortgage. The framework takes a similar approach to bipartisan measures already introduced in the Senate. The most significant piece of housing finance legislation was introduced earlier this month by the Democratic chairman of the Senate Banking Committee, Tim Johnson, and the panel's top Republican, Mike Crapo.

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 to keep them solvent. By the end of March the companies will have sent the Treasury $202.9 billion in dividends.

Fannie and Freddie ensure the mortgage market stays liquid by buying loans from lenders and repackaging them as securities that they sell to investors with a guarantee. The House plan written by Waters includes a government guarantee for home loans and creates a lender-owned cooperative that will issue mortgage-backed securities eligible to receive federal insurance. This structure would replace Fannie and Freddie, which would be liquidated over a five-year period.

It creates an explicit government guarantee, paid for by the industry and used to capitalize an insurance fund that is tapped in times of financial crisis. The plan also would give small banks direct access to the financing for their home loans and ensure they are not shut out by larger competitors. It provides sources of funding for affordable housing.

With midterm elections approaching in November, House and Senate lawmakers are expected to turn 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.

CORRECTION: An earlier version of this post mistakenly identified of photo of singer Maxine Waters-Willard as that of Rep. Maxine Waters.

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Originally published