Fannie, Freddie Review by Treasury Approved as Amendment to U.S. Bank Bill

The U.S. Senate approved a proposal to order the Treasury Department to study how to withdraw government support of Fannie Mae and Freddie Mac, rejecting a Republican deadline for ending aid to the two companies.

The Democratic measure to study the companies, passed on a 63-36 vote, becomes part of the Senate’s financial regulation bill. It would direct the Treasury to study and make recommendations for ending government conservatorship of the companies in a way that minimizes cost to taxpayers.

The Senate voted 56 to 43 to reject the Republican amendment to phase out the mortgage-finance companies in two years and eliminate their government support.

“Don’t tear down what you have unless you know what you’re going to replace it with,” Senate Banking Committee Chairman Chris Dodd said during the debate. He called the Republican plan “the height of irresponsibility.”

Fannie Mae and Freddie Mac have drawn on nearly $145 billion in government aid since September 2008. Under the failed amendment filed by Republicans John McCain of Arizona, Richard Shelby of Alabama and Judd Gregg of New Hampshire, government aid would have been phased out within two years and the companies’ affordable-housing mandates repealed.

“The system cries out for reform now” McCain said during debate. “We’re doing nothing about it except ask the secretary of the Treasury to conduct a study? Remarkable.”

Democrats say they will look for ways to repair Fannie Mae and Freddie Mac later this year. In the meantime, the companies are needed to provide liquidity in the mortgage market, said Dodd. He called McCain’s proposed phase-out “drastic.”

‘Eager’

“This program needs to be fixed, no question about it,” Dodd said during debate. “You need an alternative housing finance system. But this amendment doesn’t offer any. It just says get rid of the one you’ve got.”

Robert Gibbs, a spokesman for President Barack Obama, echoed Dodd’s comments. “We are eager to see reform but understand that reform has to take into account a very fragile housing market,” Gibbs told reporters.

Washington-based Fannie Mae and its rival, McLean, Virginia-based Freddie Mac, operated as private companies investing in the mortgage market with an implicit government guarantee against default. The so-called government-sponsored enterprises were seized by regulators when the firms became overwhelmed by losses linked to risky mortgages.

As private companies fled the housing finance market, Fannie Mae and Freddie Mac grew even more central. They financed or backed about 70 percent of single-family mortgages in 2009 and now own or guarantee more than $5 trillion in U.S. residential debt, according to the Treasury Department.

$1.4 Trillion

The Congressional Budget Office in January estimated that direct U.S. aid to the GSEs might total $389 billion by 2019. In addition, the Treasury and the Federal Reserve last year spent $1.4 trillion to buy distressed mortgage-backed securities held by the companies.

The Democratic amendment, offered by Dodd, directs the Treasury to explore ways to liquidate, privatize, or otherwise reinvent the GSEs and make recommendations to Congress by January 2011.

To contact the reporter on this story: Lorraine Woellert in Washington at lwoellert@bloomberg.net.

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