A bipartisan group of senators is putting the final touches on a plan to liquidate Fannie Mae and Freddie Mac and replace them with a government reinsurer of mortgage securities behind private capital.

The proposed legislation, which could be introduced this month, would require private financiers to take a first-loss position adequate to cover price declines as steep as those seen during recessions over the past century, according to a draft obtained by Bloomberg News.

The bill, which is being written by Sens. Bob Corker (R-Tenn.) and Mark Warner (D-Va.) with input from other senators, is still being drafted.

According to the draft, District-based Fannie Mae and McLean-based Freddie Mac would be liquidated within five years and the U.S. Treasury would assume responsibility for their existing mortgage guarantees. The two companies, which have been under U.S. conservatorship since 2008, package mortgages into securities on which they guarantee payment of principal and interest.

The two government-sponsored enterprises have begun posting record profits after drawing a total of $116.5 billion in aid from taxpayers to stay afloat after the housing crisis brought them to the brink of bankruptcy.

The new agency, to be named the Federal Mortgage Insurance Corp., would continue existing efforts to build a common securitization platform and would have the capacity to help small lenders issue securities.

“We continue to work on a responsible and bipartisan proposal that will maintain the availability of mortgage credit, expand the role of the private sector in housing finance, and better protect the taxpayers,” Kevin Hall, a spokesman for Warner, said in an e-mail.

Laura Herzog, a Corker spokeswoman, said it would be premature to discuss specifics of the bill “because the process is still very fluid.”

Manuel Balce Ceneta


The Fannie Mae headquarters is seen in Washington, Aug. 8, 2011.