House Republican Conference Chairman Jeb Hensarling (R-Texas) today re-introduced legislation to stop taxpayer-funded bailouts of Fannie Mae and Freddie Mac and put these two companies on a path towards privatization. The failures of the two government sponsored enterprises (GSEs) have directly cost taxpayers more than $150 billion.
"The two largest, most influence-exerting, regulation-avoiding, bailed-out institutions weren't banks and weren't located on Wall Street. They were Fannie Mae and Freddie Mac, the mortgage market financial Frankensteins that were created not in a competitive marketplace, but in a government lab in Washington," Hensarling said. "The GSEs are on track to be the nation's biggest bailout, more than AIG and GM and all the big banks combined. It's time to enact fundamental reform of Fannie and Freddie before these companies go from "too big to fail' to "too late to fix.'"
Financial Services Committee Chairman Spencer Bachus said, "Reforming Fannie Mae and Freddie Mac is a top priority for the Committee. The bill Vice-Chairman Hensarling has proposed is a fulfillment of the commitment Republicans made when we urged Democrats to include reform in their bill to restructure financial services regulation. Republicans will continue to offer solutions that wind down the operations of Fannie Mae and Freddie Mac in order to protect the taxpayers from another bailout and to reform the entire housing finance system."
"The very essence of the American dream is to leave your children with more freedom, greater opportunity, and a higher standard of living than you enjoyed. Part of that dream is to own a home," Hensarling said. "Our goal is to help home-buyers stay home-owners, and free taxpayers of the burden that comes when homes get sold to buyers who simply can't afford them."
In February of this year the Administration released a report required by law outlining several options for long-term housing finance reform. One of the options would transition to a very limited role for the taxpayer in housing finance, similar to Hensarling's proposal.
"It's my hope that President Obama will work with us to pursue a path that will protect taxpayers, end the billions of dollars in bailouts, and bring certainty back to the mortgage market," Hensarling concluded.
History of the GSE Bailout Elimination and Taxpayer Protection Act
Hensarling's GSE reform legislation was originally introduced in 2008. Similar legislation was included in the Republican financial reform legislation, H.R. 3310, the Consumer Protection and Regulatory Enhancement Act. The Hensarling bill was introduced again in March of 2010 and was later offered as an amendment to the Democrats' financial regulatory reform bill, now known as Dodd-Frank. U.S. Senator John McCain offered an amendment to the financial regulation bill that was modeled after Hensarling's legislation.
Last Congress, Republican Ranking Member Spencer Bachus repeatedly called on then-Chairman Barney Frank to hold legislative hearings on Hensarling's GSE legislation, but the Democrats refused.
Additionally, House Republicans included a commitment to end the GSE bailouts by reforming Fannie and Freddie in the Pledge to America.
Summary of the GSE Bailout Elimination and Taxpayer Protection Act
* Legislation applies only to Fannie Mae and Freddie Mac (the "GSEs").
* Establishes a finite end to the GSEs' conservatorship 2 years from the date of enactment.
* Immediately implements several fundamental GSE reforms to protect taxpayers:
* Repeals of the GSEs' misguided affordable housing goals mandate and the Affordable Housing Trust Fund;
* Starts shrinking the size of the GSEs by capping their maximum portfolio size at $700 billion and gradually reducing that cap to $250 billion over five years;
* Reduces the GSEs' market share by returning the conforming loan limit to its pre-housing crisis standard limit of $417,000;
* Increased guarantee fees ("G-Fees'), to eliminate the GSEs' competitive advantage and bring more private capital into the market; and
* A prohibition on any reduction to the senior preferred stock dividends the GSEs contractually agreed to pay taxpayers under their conservatorship.
* Upon the end of the conservatorship, the Federal Housing Finance Agency (FHFA) must evaluate the financial viability of each GSE. If it is determined not to be viable, the FHFA would follow the procedure laid out by the Housing and Economic Recovery Act of 2008 (P.L. 110-289) for placing that GSE into receivership.
* If determined to be viable, the GSE would be allowed to resume limited market operations under its own control for a maximum of three (3) years, with the following new rules:
* Enhanced authority for FHFA to adjust the minimum capital requirements for the GSEs as appropriate, mirroring the existing capital adequacy requirements other regulators already have in place for banks (12 U.S.C. 3907);
* A minimum down payment requirement of at least 5 percent for all new loans, increasing to 7.5 percent in the second year and 10 percent by the third year, to increase the quality of all loans touched by the GSEs;
* Repeal of the GSEs' exemption from having to pay state and local taxes, to remove one of the distinct advantages of being a GSE; and
* Repeal of the exemption allowing GSE securities to avoid full SEC registration.
* At the end of that 3 year period, each GSE's charter expires. At that point, Fannie and Freddie must conduct all new operations as fully private sector companies competing on a level playing field without any government advantages.
* Provides for the orderly wind down of any legacy business commitments post-charter expiration over a 10 year period following the model successfully used in the Sallie Mae transition from GSE to a private company (P.L. 104-208).