Analysts: GSE Liquidation Bill Unlikely to Pass Unscathed

While a new bill proposing the liquidation of the GSEs might have investors unsure about their future, analysts at ""Barclays"":http://group.barclays.com/home insist there is little to worry about for the time being.

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The bill, authored by Sens. ""Bob Corker"":http://www.corker.senate.gov/public/ (R-Tennessee) and ""Mark Warner"":http://www.warner.senate.gov/public/ (D-Virginia) and titled the ""Secondary Mortgage Market Reform Act of 2013,"" represents a major bipartisan step for housing finance reform.

According to a discussion draft obtained by ""Bloomberg"":http://www.bloomberg.com/news/2013-06-03/senators-near-plan-to-abolish-fannie-mae-shrink-government-role.html, the legislation would liquidate Fannie Mae and Freddie Mac within five years of its passage, transferring their existing guarantee responsibilities to the Treasury. According to Bloomberg, the draft says the proceeds from the liquidation would first go to the federal government (as a preferred shareholder), then to junior shareholders, and finally to common shareholders.

In addition, the bill would replace the Federal Housing Finance Agency--the GSEs' conservator since 2008--with a new federal agency called the Federal Mortgage Insurance Corporation (FMIC). The agency would provide explicit government reinsurance of conforming loans by charging a guarantee fee (g-fee) and placing the proceeds in a Mortgage Insurance Fund (MIF). In addition, FMIC would have the responsibilities of setting standards for eligible loans, creating a standard securitization platform, and approving private mortgage insurance providers, among others.

While analysts say the bill marks an important starting point for secondary market reform, Barclays researchers say it may not go anywhere in its current form.

""The bill may have a difficult road to passage: Democrats in particular could have concerns with the bill's affordable housing provisions. With housing stabilizing and the GSEs profitable, Congress could also choose to focus on fiscal policy or other topics near term,"" they said. ""Lastly, internal conflicts may shift the administration's focus away from housing reform. These factors could delay the bill from being considered.""

""In any event, given that many important details need to be fleshed out in terms of prospective mortgage market functioning, the likelihood of passage in current form remains very low; the bill is simply a work-in-progress, and represents a bipartisan starting point for the discussion of broader housing finance reform,"" they conclude.