• By
  • Nick Timiraos

A bipartisan group of former senators and housing secretaries unveiled on Monday a comprehensive proposal in a bid to jump-start the stalled debate over what to do with Fannie Mae and Freddie Mac .

Here’s a look at some of the most frequently asked questions on the report from the Bipartisan Policy Center, a Washington think tank:

What does the report propose? The BPC’s housing commission calls for the government to wind down Fannie and Freddie within five to 10 years and replace them with a new infrastructure that would provide explicit government insurance on mortgage-backed securities, but only if private insurance providers are wiped out first. Fannie and Freddie issued mortgage-backed securities and investors bought them on the assumption that there was a fuzzy “implied” guarantee that would lead the government to rescue the firms if they got into trouble, which is exactly what happened in 2008.

Why does the BPC think that the government needs to guarantee mortgage-backed securities? At the heart of the commission’s report is the conclusion that the U.S. mortgage market should continue to offer access to low-cost, 30-year fixed-rate mortgages and that the government will need to play some market backstop in order to attract the capital needed to fund those loans. (Only one other country, Denmark, offers the product widely).

Banks don’t hold onto many of those mortgages and haven’t for decades. Instead, over the last 30 years, Fannie and Freddie, along with private banks, bundled those loans together and sold them off to investors as securities. Fannie and Freddie developed deep, liquid markets for buying and selling mortgage-backed securities, attracting capital from pension and mutual funds and foreign investors that wouldn’t otherwise invest in U.S. mortgages.

It’s been 4½ years since Fannie and Freddie were rescued by the Treasury Department. Why hasn’t the White House or Congress dealt with them? The Obama administration issued three broad options for what might happen to Fannie and Freddie two years ago, but has said little since. Conservative Republicans have argued strongly against continued government guarantees, though they have made equally little headway in producing a detailed plan. One reason for the reluctance on both sides: almost any proposal to overhaul the nation’s $10 trillion mortgage market includes unpopular steps—either limiting access to credit, raising costs, or putting some risk on taxpayers, and often a mix of all three.

There have been other housing-finance reform proposals before that have made similar recommendations. What’s different about this one? One reason the BPC report is garnering more attention is, in part, because the debate over what to do has stalled out. The commission’s co-chairs said Monday that one hope is that their recommendations force the issue back onto the agenda in Washington and encourage a more thoughtful discussion about how to move forward.

One sign that may be happening: Sen. Bob Corker (R., Tenn.) put out a statement on Monday saying the report “appears to be headed in the right direction.” Mr. Corker could be a key Republican dealmaker whenever the Senate takes up any housing-finance overhaul.

Who supports the proposal’s recommendations? The real-estate industry, including mortgage bankers and Realtors, generally gave the report a warm reception because it commits to maintaining some type of federal safety net for mortgage markets.

What objections are being raised? The report doesn’t spell out where the capital would come from to build the new mortgage market. It doesn’t say how the existing infrastructure of Fannie and Freddie might be used to create the new market, and how or if the U.S. is to recover the nearly $190 billion investment it has in the two companies (after counting dividends that have been paid to the Treasury, the total cost of the rescues are closer to $137 billion). Those concerns, of course, could be addressed later.

But there are bigger reservations that any plan structured similar to the BPC proposal will have to contend with: Can a government regulator appropriately determine how to price the cost of the new insurance that the government would provide? The report estimates that mortgage rates might need to rise by another 0.25 percentage points to ensure that the government would be protected against losses.

Another worry: private lenders will be incentivized to sell off the riskiest loans that they’re able to fit within the guidelines for any federal backing. “That’s what they did with the ratings agencies during the bubble: ‘How much can we get away with and still get a triple-A [rating]?’” said Thomas Lawler, a former economist at Fannie Mae.

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