Republicans in the House of Representatives have unveiled a sweeping piece of legislation that, if passed, will almost completely revamp the housing finance system. Unlike a bi-partisan bill introduced last month in the Senate, the House approach would virtually eliminate the government's role in housing finance.

The bill, which is still in draft form, is sponsored by Republican members of the House Financial Services Committee led by its chairman Jeb Hensarling (R-TX). It would wind down Fannie Mae and Freddie Mac (the GSEs) over a five year period and replace them with a non-profit securities platform. The platform would act as a utility for the private sector to package individual mortgages into pools, securitize them, and sell the securities to investors. Unlike a somewhat similar proposal from the Federal Housing Finance Agency (FHFA), the mortgage-backed securities would not carry a government guarantee.

The House bill would also create a system of "covered bonds" backed by mortgages. Unlike the mortgage-backed securities issued by the GSEs, these bonds would remain on the issuer's balance sheet. At the same time the lawmakers would repeal the qualified residential mortgage (QRM) rule which requires a lender to maintain "skin in the game," i.e. a 5 percent share of riskier loans they write. It would also delay implementation of the qualified mortgage (QM) rule that sets underwriting standards for mortgages and offers legal shields for lenders that follow them.

Reuters News Agency quoted Hensarling as calling the legislation "a holistic approach." He said his goal is to limit taxpayer risk and replace the current system, where "the federal government has almost a virtual monopoly."

The government would retain a role in lending through the Federal Housing Administration (FHA) which guarantees loans written by its approved lenders but that role would be sharply curtailed. FHA increased its share of the mortgage market from its traditional 15 percent range to over 30 percent during the recent housing crisis (which is its intended counter-cyclical role) and has faced mounting losses from loans it wrote in the early part of that period. The bill proposes to raise the current minimum downpayment for a FHA guarantee from 3.5 percent to 5 percent and make its loans available only to first time and moderate-income borrowers.

Fannie Mae and Freddie Mac, which own or guarantee about half of all new U.S. home loans, were seized by the government in 2008 as loan defaults and falling home prices pushed them to the brink of collapse. The GSEs required $187.5 billion in support from the U.S. Treasury while they were resolving thousands of bad loans but are both profitable and have paid taxpayers $132 billion in dividends. They are currently prevented from building any cash reserves and their dividends do not go toward reducing their debt.

The Senate bill introduced last month by Mark Warner (D-VA) and Bob Corker (R-TN) would also liquidate the GSEs within five years but replace them with a reinsurer which would backstop the private sector entities issuing mortgage-backed securities. The reinsurance would kick in only after private creditors had absorbed a loss equal to 10 percent of the principal balance of the affected securities.

The reinsurer would charge and collect fees to cover its operating costs and maintain a catastrophic fund and would continue the efforts of FHFA to develop a securitization platform.