Crapo Plan Would Kill Off Fannie Mae and Freddie Mac

By Tom Bacon

Idaho Republican Senator Mike Crapo finds himself suddenly in the political center ring with his plan to dismantle government-owned mortgage finance agencies. Crapo and Senate Banking Committee chair Tim Johnson, a Democrat from South Dakota, have agreed on a plan to wind down Fannie Mae and Freddie Mac, two agencies which own or guarantee 60 percent of all U.S. home loans.

The two agencies ran into trouble in the financial crisis of 2007, and had to bailed out to the tune of $187 billion. Crapo and Johnson have been working for months to bridge partisan differences, aiming to revamp the $10 trillion mortgage market so that taxpayers would not be on the hook for future bailouts.

Under their plan, private investors would absorb the first 10 percent of any mortgage losses, before an emergency government backstop would kick in. Both Fannie Mae and Freddie Mac would gradually run out of gas and be replaced by a new government mortgage insurer called the Federal Mortgage Insurance Corporation. It would be financed with fees imposed on lenders.

The new system would require strong underwriting standards for home loans, including down payments of at least five percent for all but first-time homebuyers. Crapo said he and Johnson are putting final touches on draft legislation which they'll release publicly by next week.
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