He introduced legislation Thursday that would wean the secondary market off government support and pay taxpayers back for the bailout of Fannie Mae and Freddie Mac.

His idea was to replace Freddie and Fannie with a new, temporary government-backed program to securitize high-quality mortgages. This transitional program must be turned over to the private sector after 10 years, the legislation mandates.

An other important part of the bill is the new mechanism it creates to repay taxpayers the full amount of bailout money that has been funneled to Freddie Mac and Fannie Mae, since the two mortgage financiers were placed into conservatorship in September 2008. According to public information, the GSEs have required over $150 billion in taxpayer support.

Isakson’s idea is to create a new, self-funding catastrophic fund, which could protect taxpayers from future bailouts or another housing collapse during the 10-year transition period, before privatization.

“This legislation is a detailed roadmap to change the unsustainable course we’re on in which the American taxpayers have been bailing out the mortgage industry to the tune of hundreds of billions of dollars,” Isakson said. “My bill will shut down Fannie Mae and Freddie Mac through an orderly transition, and it will repay the taxpayers.”

The reply of the lawmakers: the amount of bonus pays is outrageous, so they are willing to go far beyond hot-tempered rhetoric to stop these bonus payments.

Rep. Spencer Bachus (R-Alabama), chairman of the House Financial Services Committee, took the time and scheduled a committee vote for next Tuesday on a bill that aims to suspend the compensation packages awarded to these people.

Underscoring that the bailout of the GSEs is the biggest in history, Chairman Bachus said, “The American people should be outraged at the multi-million dollar taxpayer-funded bonuses given to the executives of Fannie Mae and Freddie Mac. These organizations were ground zero for the mortgage market meltdown, the catalyst for an economic decline that has cost Americans more than seven million jobs.”

Edward DeMarco, who’s decisions were questioned by Kamala Harris, California Attorney General, replied in a letter published two days ago that “the individuals responsible for the GSEs’ failures and ultimate seizure by the government have long since left the companies and were not give severance or golden parachutes.”

“By law, the conservatorships are intended to rehabilitate the Enterprises as private firms,” DeMarco said. “Their officers are not public employees, and FHFA has used market compensation measures to target executive compensation at or below the median of comparable private sector positions,” he said, cited by DsNews.

As a response to DeMarco’s bonus payment decision, Bachus cited an April report from FHFA’s report, which reveals that DeMarco often forgets to mention amounts the granted to executives of the two GSE’s. But the most aching part, is that they are making this payment from the taxpayer’s money.

Bachus calls the multi-million dollar compensation “an added insult to the taxpayers who are forced to foot the bill.”

His Equity in Government Compensation Act received bipartisan support when it was approved by the Capital Markets and Government Sponsored Enterprises Subcommittee in April.

The bill aims to suspend compensation packages for GSE executives and initiates that Fannie Mae and Freddie Mac employees would be paid according to the federal government’s General Schedule pay scale. The bill also calls for the 2010 and 2011 packages of senior executives to be returned to taxpayers.

The request comes after Freddie posted its quarterly results: the company recorded a net loss of $4.4 billion for the third quarter of 2011, more than twice the loss it recorded in the second quarter.

According to the numbers the Virginia-based mortgage giant posted, its latest earning results reflect net interest income of $4.6 billion, but the the company shouldered a $4.8 billion loss on derivatives and a $3.6 billion provision in credit losses.

Freddie Mac’s CEO Charles E. Haldeman, Jr. pointed out that hundreds of thousands of borrowers refinanced into lower mortgage rates or shorter mortgage terms in the third quarter. Long-term interest rates declined by approximately 125 basis points in the third quarter, compared to a decrease of about 30 basis points in the second quarter.

“[T]he borrowers we helped to refinance will save an average of $2,500 in interest payments during the next year,” Haldeman said.

These savings – underscored by Haldeman – means less money is coming in for Freddie, so this results in higher loss severity rates, which are likely to grow in the fourth quarter, as the government is retooling the HARP, which is expected to add another 1 million borrowers with loans backed by Freddie and Fannie.

Freddie’s $4.4 billion loss in the third quarter combined with the $1.6 billion dividend payment it made to Treasury for past bailout money left the GSE with a $6 billion net worth deficit as of the end of September. To eliminate this deficit, the Federal Housing Finance Agency (FHFA), as conservator, is submitting a draw request to Treasury for the same amount.

The company’s Q3 request is the biggest since the first quarter of 2010, and brings the total taxpayer supported bailout to $72.2 billion, while the GSE returned only 1$14.9 billion to Treasury.

Professors Ran Duchin and Denis Sosyura signed the report, after studying risk among banks receiving TARP funds and banks that did not, controlling for volume and quality of credit demand to account for changes in economic conditions.

“Our main finding is that after receiving federal capital, bailed banks shifted their credit origination toward riskier mortgages, as measured by the borrower’s loan-to income ratio and the high-risk loan indicator based on the loan rate,” Duchin and Sosyura state in their report.

What they found that while the original credit wasn’t affected, the risk inherent in the loans grew higher. They observed this among bailed out banks, while it did not affect the bank’s capitalization levels.

“Consequently, bailed banks appear safer according to the capitalization requirements, but show a significant increase in market-based measures of risk,” the report states.

TARP recipients absorbed the riskier mortgages on the market, so other banks weren’t affected, which resulted in other banks lowering their percentage of risky loans.

An explanation suggested by the researchers is that the Treasury purposely distributed funds to banks who were more likely to experience a significant future shock as a result of their crisis exposure of other factors.

“From a policy perspective, our findings show that any capital provisions should establish clear investment guidelines and provide mechanisms for tracking the deployment of capital by recipient institutions in order to limit the unintended consequences of government aid,” the report concludes.

The Congressional Budget Office or CBO estimated that two of the country’s biggest lenders, Freddie Mac and Fannie Mae will need another $42 billion from taxpayers to cover anticipated losses over the next decade if they live in their current form.

Back in 2008 the two companies were seized by the government and received $154 billion in financial assistance and paid back $24 billion in dividends for a net of $130 billion.

Director of the CBO, Douglas W. Elmendorf said extra funding is needed for these companies as long as they price their mortgage guarantees below private institutions. But what will be the faith of the two mortgage financiers isn’t clear yet, as lawmakers introduced 15 different bills aimed at speeding up their wind-down and limiting taxpayer support.

“Whatever model for the secondary market is ultimately adopted, the expected losses on the GSEs’ existing business will largely be borne by taxpayers, because private investors would not assume those obligations without compensation,” said Deborah Lucas, CBO’s assistant director for financial  analysis.

The statistics are: Fannie Mae and Freddie Max owned or guaranteed roughly half of all outstanding mortgages in the US last year and they financed over 60% of the new mortgages originated in 2010.

“The GSEs’ operating assets are valuable,” Lucas testified. “They could be auctioned off to investors, with the proceeds helping to offset some of the losses to taxpayers, or kept for use by a federal agency.”

“The housing market is still in very fragile shape – no two ways about it. For the homeowners, for taxpayers, and for working families across this country, we need to put an end to the ongoing bailout of Fannie and Freddie and advance serious solutions,” Chairman Paul Ryan (R-Wisconsin) said.

In the meantime, according to the Congressional Oversight Panel’s Chair, Harvard Law Professor, Elizabeth Warren, by their April report, the foreclosure crisis did not show any signs of abating. In that report it is mentioned “principal forbearance was rare and principal forgiveness rarer still. Deferred principal accounted for about 28 percent of the mortgage modifications, while only six percent of them involved principal cuts. An additional six percent incorporate principal cuts and deferred principal.”

The report noted “The Panel has concerns as to whether the modifications make homeownership sufficiently affordable to avoid foreclosure, given borrowers’ broader circumstances. As noted previously, the program without considering the existence of junior liens leaves borrowers still paying a significant percentage of their income for housing. This is particularly problematic because most HAMP modification recipients are underwater.”

The Panel’s report dealt with in detail the problem thus – “This points to the problem with the lack of principal forgiveness in HAMP up to this point. Lack of principal forgiveness means that homeowners will continue to be underwater. It also means that more of each payment will be going to interest, rather than paying down principal, and it may mean that some borrowers have to pay for longer period of time. All of these factors increase the re-default risk on modified mortgages, and to the extent that a permanent modification is not sustainable, it merely delays a foreclosure and the stabilization of the housing market.”

The report pointed out that as in April, less than a quarter of eligible homeowners have converted from temporary trial modification plans into five-year plans. Treasury originally forecast up to a 75 percent conversion rate. And while it’s too early to tell the rate at which these modified loans will default, Treasury estimates a 40 percent re-default rate.

But that was in April –  we are in July now and yet to see “principal reductions” as planned.

According to this new program, the qualified unemployed borrowers of mortgage loans can have a forbearance period, which reduces or suspends their monthly mortgage payment.

Importantly, this program is beneficial for conventional loans only; government loans such as FHA are not included, but refinance options may be taken through FHA mortgage to settle the existing conventional loans.

Mortgage servicers are required to offer UP when the following qualification criteria is met:

• The mortgage loan should have originated on or before January 1, 2009 as a first lien mortgage.
• Secured by a one-to-four unit property – one unit of which is the borrower’s principal residence and the unpaid principal balance (UPB) is equal or less than $729,750 on one unit properties.
• The concerned mortgage loan should not have been previously modified under HAMP and no UP forbearance period has been previously received by the borrower.
• Borrower is unemployed at the date of making the request for UP and is able to provide documentary proof – either they will receive unemployment benefits or have been receiving unemployment benefits at the commencement of the forbearance plan.
• Servicers have the discretion whether or not to require a borrower to have received unemployment benefits for up to three months prior to the commencement of the forbearance plan.
• Borrower is either delinquent on the mortgage repayment, but has not missed more than three consecutive monthly payments or default is reasonably foreseeable.
• It is for the servicer whether to offer UP if a borrower’s total monthly mortgage payment is less than 31 percent of the borrower’s monthly gross income.

It was estimated that around 30% of these homeowners have underwater mortgages and more than 4 million homeowners are in the brink of foreclosures – most of them are even 90 days beyond their dues.

Fannie Mae generates income through interest rate differences between its funding to the lending institutions and interest on mortgage securities it holds as investments. Additional income is also derived through it, significantly from guarantee fees for assuming the credit risk on mortgage loans guaranteed by it. According to estimates, Fannie Mae’s mortgage portfolio was in excess of $700 billion, as of August 2008.

Fannie Mae and another GSE – Freddie Mac – although not entirely backed by the US Government through its Treasury Department, were certified as “playing a central role in the US housing finance system”, to alley the market fears by the Government, when the devastating foreclosure crisis hit the country in 2007.

The impact of foreclosure crisis has uprooted many financial institutions, in declaring bankruptcy and still more to follow suit, thus eroding public confidence on the credibility of the financial system presently.

With this back-story, now the disturbing news is Fannie Mae’s holding properties foreclosed for default in mortgage repayments, nearly doubled from what they were in 2009. The quarterly report on earnings of Fannie Mae, pertaining to the first quarter ended March 2010, in its single-family portfolio, the foreclosure rate soared to 1.36 percent, up from the reported 0.55 percent during 2009.

The holdings of Fannie Mae in its single-family portfolio were more than $11.4 billion in the first quarter of 2010, up from the figure of $6.2 billion, during the same period of last year.

The financial loss of Fannie Mae, as reported in the first 3 months of 2010 was $11.5 billion and the GSE has requested an aid of $8.4 billion of the tax-payers’ money from the Treasury Department. As regards foreclosure volume, from 62,000 properties in 2009, it went up to more than 109,000 properties presently and at the beginning of the period under review it stood at 86,000 properties.

Foreclosure properties held by Fannie Mae were contributed region-wise as follows: Southeast region of US contributed the most by 17,700 properties; Midwest region 15,000 properties; Southwest 12,800; West 12,600 and last by 3,500 from Northeast region.

In the quarterly analysis report under review, Fannie Mae states that consequent to the foreclosure moratoria adopted by the market, the levels of foreclosures were impacted during the first 6 months of 2009 to be less. The report adds “The continued weak economy and high unemployment rates, as well as the prolonged decline in home prices on a national basis, continue to result in an increase in the percentage of our mortgage loans that transition from delinquent to foreclosure status and significantly reduced the values of our foreclosed single-family properties”.