Hensarling Bill Stops Bailouts of Fannie Mae and Freddie Mac

Rep. Jeb Hensarling (R-Tex.) will introduce a bill today that would end the conservatorship period for Fannie and Freddie in 2 years and re-enter them into the market—if they are financially viable by then.

The bill, cited as “The GSE Bailout Elimination and Taxpayer Protection Act,” is ultimately meant to provide what Rep. Hensarling stated as his goal, “market competition and taxpayer relief.”

The congressman said that Fannie Mae and Freddie Mac, as government-sponsored enterprises (GSE), pose a great risk to taxpayers in their current fiscal state, and that something must be done to ensure there is no future bailout of the GSEs by taxpayers.

“Again, we’ve been waiting for Chairman Frank to do something, we’ve been waiting for Chairman Dodd to do something, we’ve been waiting for the Treasury to do something, and we don’t see it,” Hensarling told reporters during a Thursday morning pen-and-pad session in his office. “So we’re providing leadership here.”

The congressman summarized what his legislation, if passed, will hope to accomplish.

“Essentially, in a nutshell…the bill will provide the ability for the conservatorship of Fannie and Freddie to continue on for 2 more years, after which there will be a 3-year transition that ultimately is going to either lead to these two institutions going into a competitive market, or sending them into receivership.”

Hensarling added that within the 5-year period, “we will immediately repeal the affordable housing goals for Fannie and Freddie, which frankly helped drive them to buy all this subprime.” Such actions in the housing market, he said, “ultimately turned a national cold into a deadly pneumonia.”

The legislation then details the conditions under which a GSE, if it is deemed financially healthy after the two-year period, will be released back into the market for a maximum of three years. Among the details are included the stipulations below.

Aside from the repeal of the affordable housing goals mandate for Fannie and Freddie, portfolio limits will be enacted, beginning with the amount of $850 billion after year one, decreasing in year two, and ending with $250 billion after year three.

Repealed will be the GSEs’ exemptions from paying state and local taxes, and from avoiding full SEC registration of their securities.

Also, all new loans touched by the GSE will require a minimum down payment of 5 percent, increasing until the third year when the minimum will be 10 percent.

And after the three-year period, each GSE’s charter will expire and they must conduct operations as completely private sector companies, having to compete on a level playing field with the rest of the market.

“I think if you don’t start right now,” Congressman Hensarling said of reforming the GSEs, “there will never be a competitive market. You cannot compete with somebody who has a government guarantee and has a printing press for money in the back room.”

“I’m not sure you can say that the homeowner would necessarily be better off with Fannie and Freddie, and I know for a fact that the taxpayer is not,” Hensarling noted. “The American dream is not buying a home; the American dream is owning a home—owning a home you can keep.”

“The American nightmare is buying a home that two years later is foreclosed upon. And Fannie and Freddie, I’m afraid, enabled a whole lot of American nightmares.”