(MoneyWatch) What would the U.S. housing market look like without mortgage giants Fannie Mae and Freddie Mac?
Rep. Jeb Hensarling, chairman of the powerful House Financial Services Committee, thinks he knows, and he likes the idea. The Texas Republican has proposed legislation that would phase out Fannie and Freddie over five years and drastically reduce the federal government's role in the mortgage market.
Although there have been other bills proposed aimed at dismantling the mortgage market's two biggest players, Hensarling's legislation is the latest, and perhaps most aggressive, of these efforts. Besides killing off the so-called government-sponsored enterprises, the plan would shrink the Federal Housing Authority, encourage the growth of the private mortgage market, establish standards for how mortgages are handled and eliminate certain credit standards.
Lawmakers will discuss the measure at a hearing on Thursday.
Some mortgage and housing analysts have criticized the bill.
"I think the bill misses the mark in some ways," said Ethan Handelman, vice president for policy and advocacy for the National Housing Conference's Center for Housing Policy.
The National Housing Conference, a nonprofit advocacy group, has called the bill's potential effect on the housing market dire. Julia Gordon, director of housing finance and policy at the Center for American Progress, a Washington think-tank, claims the bill threatens the housing recovery.
Gordon has called the bill a "politically motivated sideshow that ignores the general consensus forming around the government's role in a responsible market," accusing it of being the "ultimate right-wing wish list, turning the entire mortgage market over to Wall Street lock, stock and barrel."
Critics claim it would eliminate the 30-year fixed-rate mortgage and put homeownership out of reach for millions of Americans. They point to what they think may be the bill's biggest failure -- that there is no explicit government backstop to guarantee mortgages.
The fear is that without such an explicit federal commitment, the country would be left in a situation similar to the before the financial crisis, when the government was expected to step in if the system crashed. This led, in part, to the government taking Fannie and Freddie into conservatorship in 2008.
"We need to make sure a government backstop is there that can expand when needed and contract when it's not, rather than subjecting the economy and American consumers to the whim of private capital," Handelman said. "If we think about what happened in the crisis, private capital created a very big bubble and dove in head first. Then when the bubble burst, private capital was the first to flee."
The National Association of Realtors echoes that sentiment. Even the Mortgage Bankers Association, which represents a lot of the private mortgage capital that Hensarling is hoping to see return to the market, has called for a government backstop.
Despite such concerns, even critics applaud the Hensarling bill's less flashy provisions, such as creating more transparency in the market, standardizing procedures and working to repeal some regulatory provisions that have hampered Americans' ability to qualify for mortgage credit.
The legislation has some competition from a similar bill introduced a few weeks ago in the Senate by Sens. Mark Warner, D-Va., and Bob Corker, R-Tenn. Unlike Hensarling's plan, which so far enjoys support only from Republicans on the House Finance Services panel, the Corker-Warner bill has bipartisan backing, including four Republican and four Democratic co-sponsors.
The Corker-Warner bill would also wind down Fannie and Freddie and replace them with the Federal Mortgage Insurance Corporation (FMIC), modeled in part after the FDIC. The FMIC would back certain mortgages issued by approved firms, but private investors would cover the first 10 percent of losses.