By Margaret Chadbourn
WASHINGTON (Reuters) - A bipartisan group of U.S. senators will introduce a bill on Tuesday to abolish Fannie Mae and Freddie Mac and replace them with a government reinsurer of mortgage securities that would backstop private capital in a crisis.
The U.S. government seized the mortgage firms in 2008 to rescue them from insolvency, spending a total of $187.5 billion to keep them afloat. Fannie Mae and Freddie Mac, which charge lenders a fee in return for guaranteeing principal and interest on mortgages, are now posting record profits.
Under the latest discussion draft of the bill, which is being led by Tennessee Republican Bob Corker and Virginia Democrat Mark Warner, the two companies would be liquidated within five years and government reinsurance would kick in only once private creditors had shouldered large losses.
The system is designed to ensure a liquid mortgage market even in times of crisis, while protecting taxpayers from losses.
"It brings discipline back into the housing finance sector where you don't have private gains and public losses," Corker said on CNBC.
The measure seeks to jumpstart the stalled debate over how to remake the U.S. housing finance system.
Analysts cautioned, however, that the legislation was simply a first step and it faced an uphill battle in Congress. Any proposal that clears the Democrat-led Senate would have to win approval in the Republican-controlled House of Representatives, where some lawmakers want a fully private system.
A mortgage system revamp, as a result, is likely to take years.
"Corker-Warner represents a milestone in the government's response to the housing crisis as it is the first comprehensive, bipartisan measure to deal with Fannie, Freddie and mortgage finance," Jaret Seiberg, a senior policy analyst at Guggenheim Securities, said in a research note.
He said, however, that there "is almost zero chance the bill introduced today will be adopted" as it is currently written.
The bill would require private entities to buy mortgages from lenders and issue them to investors as securities, according to the discussion draft. Private equity would be required to absorb a 10 percent loss of the principal underlying those new mortgage-backed securities if the loans went bad.
A new guarantor, called the Federal Mortgage Insurance Corp., would replace Fannie Mae and Freddie Mac.
It would charge and collect fees designed to cover both its operating costs and to maintain a catastrophic fund. It would also continue existing efforts to build a common securitization platform to help smaller lenders issue securities.
The new bill would not provide much for Fannie Mae and Freddie Mac's private stock holders. The improvement in their financial fortunes has led some investors to speculate that they could be re-established as private firms.
Under the terms of their bailout, the U.S. Treasury holds $188 billion in shares in the form of senior preferred stock, and any profits beyond what they need to maintain a capital buffer are swept into the government's coffers. Treasury also holds warrants to acquire almost 80 percent of the companies' outstanding common stock.
"Any proceeds from the wind-down of an enterprise shall be paid first to the senior preferred shareholders of each such enterprise, then to the preferred shareholders of each such enterprise, and then to the common shareholders of each such enterprise," the discussion draft said.
The bill's co-sponsors include Senators Mike Johanns, a Nebraska Republican; Jon Tester, a Montana Democrat; Dean Heller, a Nevada Republican; Heidi Heitkamp, a North Dakota Democrat; Jerry Moran, a Kansas Republican; and Kay Hagan, a North Carolina Democrat.
The group will hold a news conference at 2:15 p.m. EDT to discuss the legislation.
(Reporting by Margaret Chadbourn; Editing by Paul Simao)