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The Senate Banking Committee has released a draft of a new plan to replace government-sponsored entities Fannie Mae and Freddie Mac. The new Federal Mortgage Insurance Corporation (FMIC) would guarantee conforming loans and provide regulation for turning government-guaranteed loans into mortgage-backed securities.

"There is near unanimous agreement that our current housing finance system is not sustainable in the long term and reform is necessary to help strengthen and stabilize the economy," said committee chairman Tim Johnson (D). "This bipartisan effort will provide the market the certainty it needs, while preserving fair and affordable housing throughout the country."

Translation? Fannie and Freddie are volatile as long as they're being run by the government. The uncertainty over whether or not the GSEs will be privatized or remain under government conservatorship is causing interest rates to rise and banks to tighten loan standards.

The Senate proposal hopes to bring more buyers into the market by creating affordable housing funds. A 0.1 percent fee would be charged on mortgage-backed securities, which could add up to approximately $5 billion a year based on current sales volumes. Ten percent of investors' capital will be held in reserves -- more than enough for the guarantor to remain solvent for any housing crisis to come.
So far, the bill seems to be creating a new Federal Housing Authority for the middle and upper classes. Unlike the FHA, the FMIC would focus on standardizing mortgage-backed securities as investment vehicles.

Fannie and Freddie, which went bankrupt during the housing downturn after buying large numbers of fraudulent packaged loans, have both returned a healthy multi-million profit to taxpayers after being bailed out from bankruptcy.

They did so by tightening lending standards for conforming loans, and suing banks to repay the fraudulent loans that went into the mortgage securities before 2008. Fannie and Freddie would continue to turn their profits over to the Treasury for the next five years.

But the proposed plan has plenty of critics. Under the new plan, there is no provision for current preferred and common shareholders. Any profits they would receive would depend on the decision of U.S. courts.

Private investors would have to bear losses on the first 10 percent of capital investments. Critics fear this could lead to higher mortgage interest rates for consumers. In addition, insurance fees for the holders of mortgage-backed securities could lead to higher interest rates, too.

The plan also would eliminate the Federal Housing Finance Agency's mandate to provide a certain percentage of mortgages to lower- and middle-income families. This could threaten to lower the home ownership rate. Under the current bill, borrowers would be required to put down 5 percent, or 3.5 percent for first-time homebuyers.

The biggest concern is for the fragile housing recovery, which is already showing signs of slowing down. Housing prices have risen steadily for over two years, shutting out some homebuyers. In January 2014, first-time buyers held the lowest market share of homebuyers since before 2008.

President Obama and bipartisan lawmakers intend to reduce the government's responsibilities in the housing market and create a stronger housing finance system.
Supporters of the bill, such as the National Association of Home Builders, believe that more private capital will pour into the housing market. Basically, investors will be investing in borrowers and their lenders' wisdom, rather than the GSEs.

The plan's architects, Senators Johnson and Crapo, plan to hold a committee vote in the next few weeks before the bill is formally introduced to the floor. Meanwhile, expect continuing tight credit and higher mortgage interest rates.

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