Bipartisan Senate legislation would wind down Fannie Mae and Freddie Mac in five years and in the interim would maintain the current arrangement in which the mortgage financiers pay all of their profits to the Treasury.

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

The bill would sell off the companies’ assets and replace them with government bond insurance that would kick in only after private capital suffered significant losses.

“This proposal includes an explicit government guarantee in order to add stability to the economy, keep costs reasonable for borrowers and renters, and ensure fair access to the secondary market for all lenders,” Johnson said in an e-mailed statement.

The two senators announced key provisions of the bill on March 11.

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.” Sen. Elizabeth Warren, a Massachusetts Democrat, said Thursday that the issue is “too important to rush.”

Investors Suing

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

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.

Court Decision

“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 Thursday in an interview with Bloomberg TV’s Peter Cook. “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. Sen. Pat Toomey, a Pennsylvania Republican on the banking panel, is calling for a bill that includes “fair treatment” for investors.

It remains unclear whether the Johnson-Crapo bill can gain the support it would need 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.