U.S. Senate banking leaders agree to wind down Fannie, Freddie

The leaders of the U.S. Senate banking committee on Tuesday said that they have reached an agreement on a housing finance reform proposal to wind down the U. S. mortgage giants Fannie Mae and Freddie Mac.

"There is near unanimous agreement that our current housing finance system is not sustainable in the long term and reform is necessary to help strengthen and stabilize the economy," said Senate banking committee Chairman Tim Johnson in a statement.

"This agreement moves us closer to ending the five-year status quo and beginning the wind down of Fannie and Freddie while protecting taxpayers with strong private capital, building the components for a stable secondary market and avoiding repeating the mistakes of the past," said Mike Crapo, ranking member of the Senate banking committee.

According to the new proposal, Freddie Mac and Fannie Mae would be wound down and replaced with a new government entity named the Federal Mortgage Insurance Corporation, similar to the Federal Deposit Insurance Corporation, which would only provide government assistance after private capital had taken the first 10 percent of mortgage losses.

"Government control of Fannie and Freddie with no private capital to protect taxpayers against losses is unacceptable," Crapo said.

Freddie Mac and Fannie Mae were put under conservatorship by the U.S. government after suffering heavy losses from the collapse of the subprime mortgage market in 2008. Now the two government- sponsored enterprises have returned to profit due to a gradual recovery in the housing market, fueling debates on how to wind them down in the next few years.

Freddie Mac and Fannie Mae own or guarantee about half of all mortgages in the United States, or nearly 31 million home loans. Along with other federal agencies, they backed nearly 90 percent of new mortgages over the past few years.

The Senate banking committee plans to release the draft bill of winding down Fannie Mae and Freddie Mac in the coming days and hold a vote in the coming weeks. But the midterm elections make it less likely to pass through the Congress this year.