Fannie Mae and Freddie Mac would continue paying all of their profits to the Treasury for the next five years under bipartisan Senate legislation designed to wind down the U.S.-owned mortgage financiers and overhaul the government’s role in the housing market.

A draft of the measure, released yesterday by Senate Banking Committee Chairman Tim Johnson and Republican Mike Crapo, would ensure the U.S. maximizes its return on the 2008 taxpayer bailout of the two companies before junior preferred and common shareholders receive any proceeds.

The bill calls for the sale of the companies’ assets and would fill the firms’ role in the housing market with government bond insurance to kick in only after private capital suffered significant losses.

Housing industry groups said they’re closely scrutinizing the technical details of the 442-page bill before the committee begins to refine the language at the end of April.

“Our priority is to avoid any immediate overreaction one way or the other,” Mortgage Bankers Association President David Stevens said in a telephone interview. “This is a time when all stakeholders can have input productively on a bill that’s workable.”

Stability ‘Positive’

Jerry Howard, CEO of the National Association of Home Builders, said the measure appears to be balanced. Increased costs of mortgages under the new system would be offset by “the stability the bill would bring that would be a positive for the marketplace,” he said in an interview.

The five-year wind down of the two companies would be extended if necessary to prevent market disruptions or spikes in borrowing costs, according to details released Sunday.

Johnson and Crapo said they took the “rare action” of releasing bill language on a weekend “to balance the committee members’ interests in having adequate time to review the legislation while advancing housing finance reform in a timely manner.” Senator Elizabeth Warren, a Massachusetts Democrat, said on March 13 that the issue is “too important to rush.”

Investors including Perry Capital LLC and Fairholme Capital Management LLC are suing the U.S. to challenge the arrangement in which all the companies’ profits go to the Treasury. The Senate measure says that arrangement would be changed only if needed to facilitate sales of the companies’ assets.

Paying Taxpayers

Fannie Mae and Freddie Mac, which received $187.5 billion in taxpayer funds after they were seized and taken into U.S. conservatorship in 2008, will have sent $202.9 billion back to the Treasury by the end of this month. Stockholders say they should have a chance to share in the companies’ financial turnaround.

Crapo said last week that courts should decide how the companies’ investors are treated.

“They have filed suit right now in order to challenge the way that the current conservatorship is managing the current profitability of Fannie Mae and Freddie Mac,” Crapo, the Idaho Republican who is co-writing the bill, said in an interview with Bloomberg TV’s Peter Cook on March 13. “We are not necessarily going to dictate the outcome of that. That will be a decision that’s made in the courts.”

Hedge funds have lobbied Congress to re-capitalize the companies instead of winding them down. Senator Pat Toomey, a Pennsylvania Republican on the banking panel, is calling for a bill that includes “fair treatment” for investors.

Midterm Elections

The Johnson-Crapo bill may struggle to gain the support it needs to advance in the next four months, before lawmakers’ attention shifts to midterm elections. A Democratic Senate aide said last week that the leadership is currently unenthusiastic about legislation that would eliminate the companies.

“All the sincere effort expended by the Senate Banking Committee simply confirms that there is no better alternative,” Fairholme Chief Investment Officer Bruce Berkowitz said in a statement on March 11. “Their core insurance businesses need to be restructured in a way that compensates and protects the taxpayer, not thrown away.”

In the House, a bill that would almost entirely privatize the mortgage market, written by Financial Services Committee Chairman Jeb Hensarling of Texas, hasn’t gained enough support for a vote of the full chamber. It is unclear whether the House would act this year even if the Senate passes a bill.