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 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 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 yesterday.

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 Suing

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 measure released yesterday 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.