Stepped-up demands from liberal Democrats and conservative Republicans are threatening the prospects for legislation to revive and reform the private mortgage market, six years after it collapsed and largely disappeared during the Great Recession.
As a result, many see an increasing likelihood that Fannie Mae and Freddie Mac, the government-run housing finance giants that required massive bailouts at the height of the financial crisis, but which have served a critical role in keeping the mortgage market up and running since then, may escape the death sentence that political leaders laid down just a few years ago.
While a bipartisan bill has emerged in the Senate to gradually phase out Fannie and Freddie and their dominant roles underwriting and guaranteeing prime mortgages since the government took control of them in 2008, liberal Democrats now want to add mandates that would require private lenders to offer loans to Hispanics, blacks and other disadvantaged groups. If successful, that likely would kill the fragile support for the bill from Republicans, who blame such mandates for causing the 2008 crisis in the first place.
In the House, conservative Republicans are insisting that Fannie and Freddie be entirely eliminated, with no residual role for the government as a last-resort guarantor of mortgage debt as envisioned in the Senate bill. That move likely would spell the end of popular 30-year mortgages and shatter the fragile bipartisan consensus behind the Senate compromise. Because of its divisive approach, House Republican leaders have been reluctant to bring up a bill passed by the House Financial Services Committee that would force the mortgage market to go “cold turkey” without government support.
The Senate Banking Committee this month is expected to mark up the bipartisan bill drafted last month by Chairman Tim Johnson, South Dakota Democrat, and the committee’s ranking minority member, Sen. Mike Crapo, Idaho Republican. The bill would phase out Fannie and Freddie while setting up a new agency to offer a much more limited government guarantee on securities backed by prime mortgages.
Banks and private lenders would take over the business of writing and securitizing loans once again, and they would be responsible for covering the first 10 percent of losses on the mortgages they make — providing a big incentive to offer less-risky loans. Banks and borrowers would pay a fee for the government backstop insurance that would cover only losses greater than 10 percent.
The bipartisan measure “moves us closer to ending the five-year status quo and beginning the wind-down of Fannie and Freddie, while protecting taxpayers with strong private capital, building the components for a stable secondary market and avoiding repeating the mistakes of the past,” Mr. Crapo said when the bill was unveiled. “Government control of Fannie and Freddie with no private capital to protect taxpayers against losses is unacceptable.”
The hope is the bill would entice private lenders back into the mortgage market at a time when some of the biggest players, including Bank of America and J.P. Morgan Chase, are quitting or drastically scaling back their mortgage businesses. Although analysts generally expect the bill to pass through the committee, its prospects are dim. Among other obstacles, Senate Majority Leader Harry Reid, Nevada Democrat, is not keen to bring up the matter with several Senate Democrats facing tough re-election battles, and he is said to be lukewarm about eliminating Fannie and Freddie altogether.
“Odds are against a bill being completed this year” after the bipartisan bill moves out of the Senate committee, said Brian Gardner, a Washington analyst with Keefe, Bruyette & Woods. “We think even a vote on the Senate floor for that bill is less than 50-50.”
While both sides seem to agree about phasing out most of what Fannie and Freddie do to package mortgage securities and sell them to investors with an implicit government guarantee, major sticking points have emerged beyond that over the government’s role as a last-resort guarantor and promoter of affordable housing, he said.
Keep Fannie alive?
After five years of partisan gridlock on reform legislation, there is a growing fear that reforms may never pass the divided Congress. Beyond the political stalemate, Fannie and Freddie have become increasingly attractive as wards of the government because they are posting sizable quarterly profits that have served to pay back more than their $189 billion government bailouts, while helping slash government budget deficits.
“The most likely way that Fannie and Freddie survive is for Congress to do nothing and totally abandon mortgage finance legislation,” said Mr. Gardner. “If this is the outcome, we expect it will be a long, painful death for reform legislation because many in Congress will be unwilling to give up the fight.”
Some powerful lobbying forces would quietly prefer the status quo. Legislators increasingly are willing to hold on to Fannie and Freddie as cash cows for the government, and the companies’ shareholders who were disenfranchised by the government takeover in 2008 are getting bolder about asserting their rights to share in their good fortunes.
The powerful hedge funds that scooped up Fannie and Freddie shares for pennies on the dollar during the crisis are now demanding that they receive the dividends to which they are entitled, or at least be compensated by the government for taking custody of the companies and seizing their profits without regard to the near total loss for shareholders. Stockholders are also pursuing those arguments in a closely watched court case contesting terms of the government takeover.