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Dems Defeat a McCain Amendment to Wind Down Fannie and Freddie

May 11, 2010 - by Donny Shaw

Senate Democrats beat back an amendment to their financial reform bill from Sen. John McCain [R, AZ] on Tuesday that would have required the government to release Fannie Mae and Freddie Mac from their control and force them to sink or swim in the free market like all the other financial companies. The amendment was defeated by a vote of 43-56, with all Republicans voting in favor along wit two Democrats — Sen. Evan Bayh [D, IN] and Sen. Russell Feingold [D, WI].

Annie Lowrey at Washington Independent explains the amendment in more detail:

The GSE amendment would effectively shutter the mortgage giants, which together backstopped 97 out of 100 new mortgages in the first three months of the year, according to Inside Mortgage Finance. It would keep keep the current government conservatorship in place for 24 months (or 30 months, if the Federal Housing Finance Agency determines that market conditions are “adverse”). Then, it would begin begin the process of dissolution.

Were Fannie and Freddie to prove “viable” as private institutions (a term left ambiguous) after 24 or 30 months, they would become highly regulated institutions for three years, before the expiry of their charters. They would have no affordable housing goals, would have to reduce their mortgage assets yearly, could not purchase mortgages exceeding median-home values and could only buy mortgages with certain minimum down payments — among other provisions. Additionally, they would have to pay taxes. Were Fannie and Freddie not “viable” in two years — likely, given that Fannie reported yesterday that it does not see itself reporting a profit for the “indefinite future” — the amendment puts them into receivership.

Most Democrats said that they wanted to reform Fannie and Freddie and end their conservatorship, but that the McCain amendment would have do so recklessly and would throw the already-fragile housing market into disarray. “Don’t tear down what you have without knowing what you’re going to replace it with,” said Banking Committee Chairman Sen. Chris Dodd [D, CT] during the debate. “We could fall right back into a recession … It would be a drastic mistake.”

In attempt to show that they are serious about fixing Fannie and Freddie and ending their conservatorship status, all Democrats besides Russ Feingold voted to pass a separate amendment sponsored by Dodd to require the Secretary of the Treasury to study and make recommendations to Congress on ending the conservatorship of Fannie Mae and Freddie Mac. Six Republican sided with them — Scott Brown [MA], Susan Collins [ME], Mike Johanns [NE], Lisa Murkowski [AK], Olympia Snowe [ME], andGeorge Voinovich [OH].

The text of the amendment is not immediately available, but according to an email from the Senate Banking Committee, here’s what it asks the Treasury to look at, more specifically:

The amendment requires the Treasury to specifically look at a number of options for ending the conservatorship of Fannie and Freddie, including;

  • the wind-down and liquidation of Fannie and Freddie;
  • the privatization of the 2 GSEs;
  • the break-up of the GSEs into small companies; and
  • other options that may be available.

UPDATE: Here’s the full text of the Dodd study amendment that was adopted:

(a) Study Required.—

(1) IN GENERAL.—The Secretary of the Treasury shall conduct a study of and develop recommendations regarding the options for ending the conservatorship of the Federal National Mortgage Association (in this section referred to as “Fannie Mae’’) and the Federal Home Loan Mortgage Corporation (in this section referred to as `”Freddie Mac’’), while minimizing the cost to taxpayers, including such options as—

(A) the gradual wind-down and liquidation of such entities;

(B) the privatization of such entities;

(C ) the incorporation of the functions of such entities into a Federal agency;

(D) the dissolution of Fannie Mae and Freddie Mac into smaller companies; or

(E) any other measures the Secretary determines appropriate.

(2) ANALYSES.—The study required under paragraph (1) shall include an analysis of—

(A) the role of the Federal Government in supporting a stable, well-functioning housing finance system, and whether and to what extent the Federal Government should bear risks in meeting Federal housing finance objectives;

(B) how the current structure of the housing finance system can be improved;

(C ) how the housing finance system should support the continued availability of mortgage credit to all segments of the market;

(D) how the housing finance system should be structured to ensure that consumers continue to have access to 30-year, fixed rate, pre-payable mortgages and other mortgage products that have simple terms that can be easily understood;

(E) the role of the Federal Housing Administration and the Department of Veterans Affairs in a future housing system;

(F) the impact of reforms of the housing finance system on the financing of rental housing;

(G) the impact of reforms of the housing finance system on secondary market liquidity;

(H) the role of standardization in the housing finance system;

(I) how housing finance systems in other countries offer insights that can help inform options for reform in the United States; and

(J) the options for transition to a reformed housing finance system.

(b) Report and Recommendations.—Not later than January 31, 2011, the Secretary of the Treasury shall submit the report and recommendations required under subsection (a) to the Committee on Banking, Housing, and Urban Affairs of the Senate and the Committee on Financial Services of the House of Representatives.

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