* Government-run firms are largest mortgage finance sources
* Some investors speculate firms could be re-privatized
By Margaret Chadbourn
WASHINGTON, May 29 (Reuters) - A bipartisan group of U.S. senators hopes to introduce a bill in the coming weeks to overhaul the housing finance system and wind down government-run Fannie Mae and Freddie Mac, people familiar with the matter said.
The plan being crafted by Senators Bob Corker, a Tennessee Republican, and Mark Warner, a Virginia Democrat, would seek to build a single entity to guarantee mortgages, according to these sources.
Fannie Mae and Freddie Mac, which were taken over by the government in 2008 as they teetered on the brink of insolvency, own or guarantee about half of all U.S. mortgages. Given the dominant role they play in the mortgage market, it could take years for Congress to settle on how best to replace them.
A Corker-Warner bill could mark the beginning of that effort, if the senators are able to piece together a large enough political coalition. While Democrats and Republicans agree on the need to shrink the government's housing finance role, they are divided over where a new line should be drawn.
"What Senators Corker and Warner are doing is laudable. They are wading into a highly partisan fight and trying to put forward an initial approach," said Jaret Seiberg, a senior policy analyst at Guggenheim Securities. "They are looking at a problem and coming up with a practical solution. It is not going to be the solution that is finally enacted into law, but it will be the solution that gets the reform process moving."
Fannie Mae and Freddie Mac charge lenders a fee in return for guaranteeing principal and interest on mortgages, a system designed to boost lending by banks and home ownership.
Since being placed into government conservatorship, they have draw almost $190 billion in taxpayer aid. But both of the so-called government-sponsored enterprises, or GSEs, have returned to profitability, and the swing in their financial fortunes has intensified the debate over how much of the risk of mortgage lending taxpayers should ultimately bear.
"There seems to be an increasing desire in Congress to do something bipartisan and to take action on the GSEs," said David Stevens, president and chief executive officer of the Mortgage Bankers Association. "If it is bipartisan, that would make it unique. Clearly, the broader the coalition, the better chance a reform bill will be heard and considered."
EXPLICIT GOVERNMENT GUARANTEE
The Senate group, which is being led by Corker, is expected to propose a newly chartered institution that guarantees principal and interest payments on mortgage-backed securities. Lawmakers would likely create an explicit federal guarantee or employ a government insurance structure.
Corker's office declined to offer details. "Discussing specifics of legislation would be premature at this point, but we hope to find something that materially improves from the past system where gains were privatized, losses were left for the taxpayer to clean up, and the system was way too thinly capitalized against downturns," said Laura Herzog, Corker's communications director.
Fannie Mae and Freddie Mac are congressionally chartered. While they operated without explicit government before they were taken over in 2008, investors assumed the government would make good on their guarantees if they ran into trouble.
"Corker and Warner are signaling the Senate is going to tackle this issue. That is why their effort is significant and material, even if the ultimate solution will not exactly mirror their bill," Seiberg said.
Many conservative Republicans want the private sector to absorb the roles Fannie Mae and Freddie Mac play, while a few moderate Republicans and most Democrats argue a government backstop is needed for the mortgage market.
When the government took over the companies, the U.S. Treasury received an 80 percent stake in each. They have also been delisted from the New York Stock Exchange and their stock now trades over the counter.
The improvement in their financial fortunes has led some investors to speculate that they could be re-established as private firms, even though the terms of their bailout do not allow them to buy out the government stake and future congressional action could wipe out the existing equity.
Fund manager Bruce Berkowitz's Fairholme Capital Management is among firms that have invested in the preferred stock of the companies, according to CNBC. The cable network reported on Thursday that Berkowitz had taken a roughly $500 million stake.
Berkowitz, who was named Morningstar's domestic-stock fund manager of the decade in 2010 and is best known for betting on financial stocks, was not available for comment on the report.
Fairholme is the latest among several investment firms and hedge funds that have been accumulating either the common or preferred stock of Fannie and Freddie. Some hedge funds have also been lobbying Congress to let the companies return to private hands.
Until a roughly 30 percent pullback on Wednesday, the common shares of Fannie Mae and Freddie Mac had risen for seven straight days.
Investors have also bid up several issues of their junior preferred shares. Fannie Mae preferred Series S shares have risen from a 2012 low of 46 cents on August 17 to $6.55 on Wednesday. Freddie Mac's preferred series Z shares have risen from a 2012 low of 42 cents on August 17 to $6.66.