Republicans Flesh Out Plan to Dissolve Fannie, Freddie in Dodd Bill

For months, Republicans have insisted that Congress should deal with Fannie Mae and Freddie Mac — the government-sponsored enterprises backstopping 90 percent of mortgages, which have received around $125 billion in taxpayer aid — in financial regulatory reform.

But their financial regulatory reform counterproposal offered little by way of a meaningful plan. The Republican proposal created an inspector general for the two enterprises, limited further taxpayer payments to them and then requested that the president submit to Congress a plan to figure out where to go from there.

Now, Sen. John McCain (R-Ariz.), Sen. Judd Gregg (R-N.H.), and Sen. Richard Shelby (R-Ala.) have created a more detailed proposal, Damian Paletta reports at The Wall Street Journal. He summarizes their idea for an amendment to the Dodd bill thus:

1. The conservatorships for both companies would end two years after the bill becomes law, though the government would be able to extend it for another six months if necessary.
2. Three years after the conservatorship ends, their government charter would expire. Then the companies would have 10 years to operate under a special holding company so that they can dissolve remaining mortgages or debt obligations they held as government-sponsored enterprises.
3. After the companies leave conservatorship, their mortgage assets would have to steadily decline, capital standards would have to go up, and the size of loans they would be able to purchase would shrink.
4. The companies would have to pay state and local taxes.
5. Fannie Mae and Freddie Mac would have to pay a fee “to recoup full value” of the government guarantee they enjoy.
6. It would reestablish the $200 billion funding limit the government set up for both companies in 2008. On Christmas Eve 2009, the Obama administration lifted that cap to an unspecified level.

In short: It dissolves Fannie and Freddie over a fifteen year time frame. (It is unclear whether or how the bill deals with other government-sponsored enterprises, like the Federal Home Loan Banks.) It limits taxpayer exposure to Fannie and Freddie’s losses in the near term. It would substantively change the way mortgage finance works in the United States — before the crisis, even, Fannie and Freddie backed 40 or 50 percent of mortgages, and this transfers that business to the private market. And it marks a sea change from three decades of Washington policy pushing and subsidizing homeownership.

I’ll have some responses to this proposal rounded up for tomorrow. But for now, I’ll note that regardless of how good the basic idea is, there is no way the amendment will make it into the Dodd bill — for reasons I have spelled out here. Moreover, putting aside the potential merits of the proposal, if it helps to define the conservative expectations for Fannie and Freddie reform and to jump-start the political and intellectual debate on the housing finance crisis in this country, I am all for it.