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WSJ - GOP Lawmaker Readies Mortgage Proposal

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By Nick Timiraos and Alan Zibel

A top Republican lawmaker plans to unveil on Thursday a proposal to rebuild the U.S. mortgage market with a reduced government role, offering the most detailed look yet at Republican plans to scrap Fannie and Freddie.

The legislation, sponsored by New Jersey Rep. Scott Garrett, advances a series of technical changes to restructure the market for buying and selling mortgage loans, or what's known as the secondary mortgage market. It builds on an earlier Republican bill that calls for eliminating Fannie and Freddie, but the latest proposal doesn't lay down a specific time frame.

"You don't want it to be too short to cause a shock to the market, but you certainly don't want it too long so that it acts as a disincentive for the private market to get back in," said Mr. Garrett in an interview.

Mr. Garrett, chairman of the Financial Services Subcommittee on Capital Markets and Government-Sponsored Enterprises, is in charge of House Republican efforts to find ways to restructure the mortgage market.

The bill would significantly broaden the mandate of the Fannie and Freddie's federal regulator, the Federal Housing Finance Agency, tasking it with setting standards for the issuance of all mortgage-backed securities and not just those by Fannie and Freddie. The goal is to replicate the deep, liquid market for mortgages constructed by Fannie and Freddie, but to do so without requiring the government to issue any guarantees.

The proposal also attempts to address shortcomings that have hindered the return of a market for mortgage-backed securities that don't have government backing. The measure would repeal a section of the Dodd-Frank financial-overhaul law designed to force issuers of mortgage bonds to have "skin in the game" by retaining a piece of the credit risk for mortgages that are bundled together and sold off as securities. The provision is unpopular with some investors and many bond issuers.

"It is a good step," said Jim Vogel, an analyst at FTN Financial. "But the idea that solving the nation's housing-finance problem is as simple as re-creating the private-label market…is far from a given."

Industry leaders voiced support for many of Rep. Garrett's proposals but were skeptical about how far they would go towards filling the void left by Fannie and Freddie, which own or guarantee around half of all $10.4 trillion in U.S. home loans.

"One of the key challenges of replacing Fannie and Freddie is creating a market where buyers and sellers of mortgage bonds can easily trade them even in times of capital market distress," said Tom Deutsch, executive director of the American Securitization Forum.

The proposal is the latest in what figures to be a protracted and high-stakes campaign over what to do with the mortgage giants, whose government takeover has put taxpayers on the hook for $141 billion.

Even as House Republicans work to wind down the housing giants, the poor health of the housing market may be working against them. Senate lawmakers last week passed a measure to increase the size of loans Fannie and Freddie can buy for two years, reversing a scheduled reduction in the loan caps that went into effect on Oct. 1.

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