Two Congressmen are set to introduce a bill that would seek to replace the mortgage finance GSEs, Fannie Mae and Freddie Mac, with at least five private companies that would be able to issue mortgage-backed securities with explicit federal guarantees.

According to a report in The Wall Street Journal, the plan proposed by Representatives John Campbell (R, CA) and Gary Peters (D, MI) is the closest thing to a compromise that could attract bi-partisan support that has been offered to date.

Under the plan, the new entities would be restricted to buying loans that meet certain criteria.  The requirements are likely to include, loan amount caps and loan-to-value limits, and would require the entities to maintain a much higher capital ratio.  Additionally, the companies would be required to pay a fee for government backing to finance a catastrophic insurance fund.  The proposal sets the responsibility for creating the final details of how the companies are set up upon an independent regulator, likely the Federal Housing Finance Agency.

The bill would also require that Freddie Mac and Fannie Mae accelerate the planned reduction of their $1.5 trillion mortgage portfolios, and the firms would then be liquidated at some point after two or more of the new firms were established.

The new entities would operate more like public utilities and likely wouldn't have exchange-listed shares.  The higher capital requirements would serve as a disincentive for the entities to hold on to large mortgage portfolios.