Republican leaders on Capitol Hill say ending the federal bailout of insolvent mortgage buyers Fannie Mae and Freddie Mac will be a major goal for the next Congress and criticize Democrats for failing to fix the pair of institutions that had central roles in the recent financial and housing crises.
House Republicans have rebuked Democrats for not including the troubled lenders in the landmark Wall Street reform bill passed by Congress and signed into law by President Obama in July, saying they ignored a central problem that led to the housing market collapse, and are prepared to take up the topic when they take control in of the chamber in January.
“Over the last few years, Americans have seen up close the fallout from policies that encourage overexposure and the reckless overextension of debt,” said Rep. Tom Price of Georgia, chairman of the Republican Study Committee, a group of conservative House Republicans. “By using Fannie Mae and Freddie Mac to manipulate the housing market, Washington created a recipe for economic disaster.”
Rep. Spencer Bachus of Alabama, the ranking Republican on the House Financial Services Committee and presumed incoming chairman, called ending federal assistance to Fannie Mae and Freddie Mac “my top priority.”
Fannie and Freddie are government-sponsored companies that either guarantee or own almost half the nation’s mortgages.
“Using taxpayer money to subsidize the mortgage market is an addiction, and like all addictions it can’t be cured overnight,” he told CNBC this month. “There will be a reasonable transition period over a number of years to allow for the private market to develop.”
Democrats have dismissed Republican accusations that they ignored problems with Fannie Mae and Freddie Mac, saying Republicans did nothing to reform the institutions when they controlled the House from 1995 to 2007. But many Democrats agree the agencies need to be revamped. Outgoing House Financial Services Committee Chairman Barney Frank, Massachusetts Democrat, has said the two institutions should be abolished.
“The only question is: What do you put in their place?” he said.
Mr. Bachus cautioned that change won’t take place immediately and that the problem must be handled delicately so as not to further disrupt the slumping housing market.
Republicans also are pressing for stricter government oversight and greater transparency of Fannie Mae and Freddie Mac’s accounting practices, including the creation of a position for an independent inspector general.
“The Democrats failed to conduct any oversight; instead, they gave the administration a protective shield from answering any tough questions regarding their actions,” Mr. Bachus told CNBC. “This protection will be gone when Republicans take control.”
Bashing the $150 billion-plus bailout of the lenders is a “political no-loser” for Republicans, said Mark A. Calabria of the Cato Institute, a Washington think thank that advocates a free-market policy.
“The more they talk about Freddie and Fannie, the better,” he said. “Even if [House members] pass something that couldn’t get to the Senate or was vetoed by the president, I think they still feel that’s a win for them” politically.
But Mr. Bachus’ approach may not satisfy all House Republicans - particularly freshmen who were swept into office with the help of the conservative “tea party” movement that often has called for a swift abolition of the lenders.
“This isn’t just an issue of Democrats fighting with Republicans. It’s going to be an issue of Republicans having to worry about, essentially, primary challenges,” Mr. Calabria said. “If you don’t want to get challenged by the tea party [in the 2012 elections], one of the things you’re going to have to worry about is your position on Fannie and Freddie.”
With the housing industry holding significant sway on Capitol Hill, even some Republicans may be reluctant to deal a death blow to the lenders, preferring instead to tweak but preserve the lending institutions, which are popular among homebuilders.
“A lot of the fight is going to be within the [House GOP] caucus,” Mr. Calabria said.
In the Senate, Sen. Richard C. Shelby of Alabama, the top Republican on the Senate Banking, Housing and Urban Affairs Committee, waged a failed effort this year to include the mortgage firms in the Wall Street reform law. He is expected to continue to push for reforms of Fannie Mae and Freddie Mac in the new year, when Democrats will hold a slim majority in the upper chamber.
Consensus on what to do with the lenders should come a bit easier in the Senate, where some predict that Mr. Shelby and Sen. Tim Johnson, South Dakota Democrat who is line to be the next banking committee chairman, will broker at least minor reforms.
“This is a situation where given the importance they had come to play in housing, you can’t tear down the old jail until you build a new one.”
With Congress divided between the major political parties, the status quo is likely to remain for Fannie Mae and Freddie Mac during the next two years. But Mr. Calabria predicts that the 112th Congress, under growing public pressure, will pass some level of reforms before the 2012 elections.
“It’s going to be a tough road, but I do think there is a road for them to get something to the president,” he said. “And I think the president doesn’t have a tremendous amount of wiggle room. I think he’s essentially going to have to sign whatever ends up on his desk.”