Legislation to Wind Down Freddie and Fannie Introduced in US Senate

Bloomberg is today reporting that a bi-partisan bill aimed at winding down the GSE’s Fannie Mae and Freddie Mac will be introduced by Senators Corker (TN) and Warner (VA) later today.

In the latest draft of the bill, Washington-based Fannie Mae and McLean, Virginia-based Freddie Mac would be liquidated within five years. The two companies package mortgages into securities on which they guarantee 100 percent payment of principal and interest on underlying mortgages.

The new legislation would require private financiers to take a loss of 10 percent of the principal underlying securities.  Mortgage industry insiders that have seen the draft have been critical of that “first-loss” provision, as it is referred to in the draft, saying it is too big a change from the current system.

Fannie Mae and Freddie Mac would be replaced by a Federal Mortgage Insurance Corp. to continue existing efforts to build a common securitization platform able to help small lenders issue securities. It also would continue Fannie and Freddie’s existing multifamily guarantees.

We suspect that the games have only just begun for this piece of legislation and who knows what the final version will look like.  However, the movement towards restoring clarity and predictability to the origination and securitization process in the US residential market remains an important objective for all sides.

About markferraris
Managing Principal Orchard Street Partners LLC

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