WASHINGTON (AP) — A plan to phase out government-controlled mortgage giants Fannie Mae and Freddie Mac and instead use mainly private insurers to backstop home loans has advanced in Congress.
The agreement by two key senators and a White House endorsement sent shares of Fannie and Freddie sinking Tuesday. Fannie stock fell $1.79, or more than 30 percent, to $4.03. Freddie dropped $1.48, or 26.8 percent, to $4.04.
The plan by Sen. Tim Johnson, D-S.D., chairman of the Banking Committee, and Sen. Mike Crapo of Idaho, its senior Republican, would create a new government insurance fund. Investors would pay fees in exchange for insurance on mortgage securities they buy. The government would become a last-resort loan guarantor.
President Barack Obama proposed an overhaul of Fannie and Freddie last year, but Congress has struggled to craft legislation. The government rescued the two mortgage giants at the height of the financial crisis in September 2008 with a $187 billion bailout, which they have repaid.
The senators' proposal "represents a good-faith compromise," Bobby Whithorne, a White House spokesman, said in a statement. "We support this effort and believe it is a workable bipartisan approach to complete the biggest remaining piece of post-recession financial reform."
As the housing market has gradually recovered and made Fannie and Freddie profitable again, they have repaid their government loans as dividends each quarter. Those repayments helped shrink last year's budget deficit to the smallest gap in five years.
The idea behind the overhaul plan is to shift more mortgage financing risk from the government to the private sector to prevent taxpayers from having to pay for any future bailouts.
"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," Johnson said in a statement. "This bipartisan effort will provide the market the certainty it needs, while preserving fair and affordable housing throughout the country."
The Banking Committee is expected to vote on the proposal in coming weeks after Johnson and Crapo draft legislation. The proposal would then be sent to the full Senate.