A mortgage-industry trade group is calling for Congress to transform Fannie Mae and Freddie Mac into several smaller privately held companies that would issue mortgage securities carrying a government guarantee. The proposed framework, to be released today by the Mortgage Bankers Association, would give successor entities to Fannie and Freddie the authority to create securities backed by certain types of mortgages, reported the Wall Street Journal. The new companies would guarantee the securities against defaults on the underlying mortgages. The new companies would also pay fees into a federal insurance fund, which would guarantee interest and principal payments to bondholders if the companies were unable to make them. Such an insurance fund, which would be triggered only if the companies were to suffer catastrophic losses, would provide explicit federal backing. That would replace the current system, in which investors have long assumed that the government would stand behind Fannie and Freddie. The new companies also wouldn’t be allowed to hold large amounts of mortgages and securities under the proposal. Fannie and Freddie hold large investment portfolios in mortgages. The proposal is one of several such plans likely to be floated this fall as debate heats up in Congress over how the government should restructure the $10 trillion home-mortgage market.
Mortgage Trade Group Calls for Fannie, Freddie Overhaul
The proposed framework, to be released today by the Mortgage Bankers Association, would give successor entities to Fannie and Freddie the authority to create securities backed by certain types of mortgages.
September 2, 2009