President Barack Obama broke almost five years of silence on post-crisis plans for housing finance by endorsing an approach that would scale back the government’s role to covering mortgage losses only during a catastrophe.
By biding his time, Obama allowed a bipartisan consensus to form around the idea. Republicans and Democrats in the Senate, housing advocacy groups and industry participants including bankers and Realtors have embraced that model, a middle ground in the debate over just how much of the risk of a housing downturn should be borne by taxpayers.
Obama lent his support to a Senate bill with a reduced government role in backing mortgages during a speech this week in Phoenix. The question now is whether the coalition will be strong enough to push forward with an overhaul this year or next, or whether it will end up mired in partisan stalemate.
“I think there is greater momentum towards reform than there has been in quite a while,” Michael Barr, a former Treasury Department official who led the Obama administration’s efforts to rewrite financial rules, said in a interview. At the same time, he said, “It’s likely to take a while to continue to build consensus.”
How fast Congress acts likely depends on the Republican-controlled House of Representatives, which must vote to approve any legislation. Republicans on the Financial Services Committee are moving forward with their own plan, which would nearly eliminate the government role in mortgages.
The House measure is unlikely to become law because it doesn’t have any Democratic support, is not backed by some Republicans, and housing industry representatives are lobbying heavily against it. Still, House Republicans could decide to hold out for their position, blocking the Senate effort.
“This is not about the Senate,” said Julia Gordon, director for housing finance and policy at the Center for American Progress, an advocacy group with ties to the Democratic Party. “The Senate is ready to move on this.”
Lawmakers from both ends of the political spectrum say the current situation is untenable: Two out of three new home loans are now backed by Fannie Mae and Freddie Mac (FMCC), the two government-sponsored enterprises, or GSEs, which puts taxpayers on the hook for additional losses.
Fannie Mae and Freddie Mac were seized by regulators in 2008 as defaults on risky loans drove them toward insolvency, and taxpayers have spent $187.5 billion to keep them afloat. Republicans and Democrats alike are calling for the companies to be liquidated and replaced with a system based more on private capital.
Republican Bob Corker of Tennessee and Democrat Mark Warner of Virginia, the authors of a housing bill that has support from both parties, say they think an overhaul could get through both the Senate and House this year.
“I know there’s a real desire to get GSE reform done this fall and I think people understand that the time is right,” Corker said in an interview.
Others are less optimistic.
“I think you have a 40 percent chance you can get to the finish line by the midterm elections, 60 percent chance that you can get done while Obama is president,” said Jaret Seiberg, a senior policy analyst at Guggenheim Securities LLC’s Washington Research Group. “That still means you have a really good chance that nothing happens. The politics of this are insanely tricky.”
The Corker-Warner bill, sponsored by five Democrats and five Republicans, would replace Fannie Mae (FNMA) and Freddie Mac with a federal reinsurer that would step in only after private capital had taken least 10 percent of the first losses on mortgage securities. The government would step in with more aid during a financial catastrophe. The measure was written with technical input from the Obama administration.
Banking Committee chairman Tim Johnson, a South Dakota Democrat and Mike Crapo of Idaho, the panel’s senior Republican, are spending August working on a bill of their own, which is likely to incorporate an approach similar to that of the Corker-Warner legislation. As senior members of the committee, Johnson and Crapo’s housing bill will take precedence over the Corker-Warner measure.
“In the Senate, both parties agree that the status quo is unsustainable, and bipartisan consensus is starting to emerge,” Johnson said in an e-mailed statement.
The bill is “our next high priority to move and I hope we’ll be moving it right after the break in August,” Crapo said in an interview.
Warner and Corker say they think the Senate and the House will be able to work out their differences.
“The last thing that many in the majority in the House want is maintenance of the status quo,” Warner said in an interview. “If we miss this window you could be stuck with Fannie and Freddie in conservatorship as far as the eye can see.”
The author of the House bill, Financial Services Committee Chairman Jeb Hensarling of Texas, said he’d be open to compromise in a conference committee if both chambers pass their housing bills.
“I’m not naive about the fact that we have a Democrat in White House and I’m not naive about the fact that the Senate is controlled by Democrats,” Hensarling said in an interview. “If something is going to get passed into law, which I would like it to be at some point in the process, by definition it will have to be a bipartisan product.”
Hensarling’s bill would liquidate Fannie Mae and Freddie Mac and limit government support for mortgages to the Federal Housing Administration, which insures home loans for buyers who don’t have large down payments.
The measure passed out of the Financial Services Committee in July with two Republicans voting against it and without Democratic support. Hensarling said he is now focused on garnering enough support from Republicans outside of the committee to try to bring it to a full vote of the House. He declined to speculate on when that could happen.
As the housing market turns around, the window could be closing for lawmakers to act before the current system becomes entrenched.
Fannie Mae and Freddie Mac, which have each been profitable for more than a year, this week announced they’d send a combined $14.6 billion to Treasury, bringing their total payments to taxpayers to $146 billion since 2009. The government takes all of their quarterly profits, which count as a dividend and not as a repayment of the bailout money.
Shareholders in the two companies, long thought to have been wiped out during the financial crisis, are starting to object to that arrangement now that it’s conceivable the government could end up with a net profit on the bailout.
Investors including hedge fund Perry Capital LLC and mutual fund Fairholme Funds Inc. have sued the U.S. in the hopes that shareholders could recoup some profits. They’ve also been lobbying Congress to allow Fannie Mae and Freddie Mac to become private companies again instead of liquidating them.
Some lawmakers say that makes them more determined to act.
“Taking the path of least resistance and allowing the GSEs to again entrench themselves deeper and deeper into our system of housing finance would be irresponsible and foolish,” Corker said in a statement. “It’s time to seize on the growing momentum to move beyond the broken Fannie and Freddie model.”
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