Plan for Mortgage Giants Takes Shape

Bipartisan Senate Proposal Envisions Home-Loan Market Without Fannie, Freddie; Firms’ Shares Fall.

Democratic Sen. Tim Johnson, left, and GOP Sen. Mike Crapo

Nearly six years after the government rescued Fannie Mae and Freddie Mac, top members in the Senate and the White House agreed on a framework to wind down the mortgage giants and overhaul the nation’s $10 trillion mortgage market.

The bipartisan proposal, coming just as the firms have begun to generate huge profits for the Treasury, complicates the picture for a host of deep-pocketed investors who had bet that Fannie and Freddie would be restructured.

The plan, by Senate Banking Committee leaders Tim Johnson (D., S.D) and Mike Crapo (R., Idaho), calls for replacing Fannie and Freddie with a new system of federally insured mortgage securities in which private insurers would be required to take initial losses before any government guarantee would be triggered.

The agreement, which faces a long road to approval, represents the most concrete step so far to resolve the last major piece of unfinished business from the 2008 financial collapse.

“It would be a huge step forward,” said Phillip Swagel, who was an assistant secretary for economic policy under Treasury Secretary Henry Paulson, who oversaw the government’s seizure of the firms in 2008.

Even though top Democrats and Republicans on the Senate panel have reached an agreement, a full Senate vote isn’t assured, and there is even less certainty that members in the House will go along. There is deep unease among House Republicans to maintaining a significant federal backstop for the U.S. mortgage market.

Other hurdles: Congress will be less likely to take up a bill as November’s midterm elections draw closer, leaving less time for debate. Consumer and industry groups are sure to resist any steps to raise loan costs or limit mortgage access.

Messrs. Johnson and Crapo said they plan to release a full draft of their bill within days and to hold a committee vote within weeks.

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