Will Fannie and Freddie be Replaced or is Proposed Bill Dead?

[Corey Dutton]

Thought to be “dead in the water,” the Johnson-Crapo bill lost some steam last week when six Democratic Senators removed their support. The proposed bill would replace Fannie Mae and Freddie Mac with a new government entity that would act as a new federal regulator for the mortgage industry and would administer a fund to cover losses on mortgage backed securities. Supporters of the bill say it would put more of the risk on private capital. However, critics of the Bill say it is bad for housing and for the recovery of the economy as a whole. According to Norbert J. Michel, PhD, a Research Fellow in Financial Regulations at the Thomas A. Roe Institute for Economic Policy Studies, the proposed bill will, “Allow private investors to price their own risk knowing that their losses are capped, thus leading to more risk taking. Second, Section 305 of Johnson–Crapo allows the FMIC to waive the risk-sharing provision in the event of a financial crisis (up to three times in any three-year period). In other words, 90 percent of private investors’ losses will be covered unless there is a national crisis, in which case they would lose nothing.[1] As the 2008 crisis made clear, these are the kinds of government guarantees that lead to more leverage in the economy, thus magnifying underlying economic risks.”

Tim Johnson announced that the committee will reconvene this Thursday to continue looking at the bill. Perhaps the Johnson-Crapo bill isn’t yet “dead in the water” as many say it is? What is your opinion on this controversial bill?

(Sources: MPAMag.com: http://www.mpamag.com/mortgage/johnsoncrapo-bill-thought-dead-is-back-on-agenda-18194.aspxhttp://www.mpamag.com/mortgage/johnsoncrapo-bill-thought-dead-is-back-on-agenda-18194.aspx

Heritage.org: http://www.heritage.org/research/reports/2014/03/johnsoncrapo-housing-finance-reform-misguided)

Posted by Corey Curwick Dutton