Senator Sherrod Brown said a comprehensive revamp of the U.S. housing finance system won’t become law this year and called for simpler changes to Fannie Mae and Freddie Mac.
Brown, an Ohio Democrat and a member of the Senate Banking Committee, said a bipartisan bill to replace Fannie Mae and Freddie Mac is too complicated and doesn’t do enough to address too-big-to-fail concerns or provide assistance for affordable housing. The panel will consider the measure on April 29. Fannie Mae and Freddie Mac shares rose.
“It’s not going to pass this year,” Brown said today at a Bloomberg Government breakfast in Washington. “If anything, it can get out of committee, I think it probably will.”
Brown said he didn’t know if Senate Majority Leader Harry Reid, a Nevada Democrat, would schedule the measure for full Senate consideration as the legislators deal with other business this year. There is also no serious effort to act on housing finance in the House of Representatives, he said.
Senate Banking Committee Chairman Tim Johnson, a South Dakota Democrat, and Republican Senator Mike Crapo of Idaho are pushing a measure that would phase out Fannie and Freddie in five years and replace them with a government re-insurer. Support is needed from key Democrats, including Brown, on the banking panel to pass the bill and move it to a Senate floor vote.
Broad backing among those Democrats will be necessary to persuade Reid to schedule a vote. Leadership aides have described Reid as lukewarm about dismantling Fannie Mae and Freddie Mac.
The bill by Johnson and Crapo is modeled after legislation introduced last year by Senators Bob Corker, a Tennessee Republican, and Mark Warner, a Virginia Democrat. The measure would dismantle Fannie Mae and Freddie Mac, which buy loans and package them into securities with guaranteed payments of principal and interest.
The U.S.-owned companies would be replaced by a system in which mortgages are mostly backed by private capital. The federal government would play a smaller role in the market by taking a backstop position on mortgage securities, stepping in only if private interests were wiped out by catastrophic losses.
It would create a Federal Mortgage Insurance Corporation to provide insurance for mortgage-backed securities. It also would allow banks to be an aggregator, guarantor, securitizer and lender of mortgages.
The bill relies on incentives to persuade financiers to lend to groups with higher risk profiles. Consumer and civil-rights advocates are pushing instead for a mandate that those groups must be served, a concept that has become a political flash point since the housing market collapsed.
Fannie Mae rose 2.6 percent to $4.02 as of 11:19 a.m. in New York. The stock is up from $3.01 on Dec. 31 and 90 cents a year ago. Freddie Mac climbed 2.5 percent, extending its gain for the year to about 39 percent. The mortgage companies dropped at least 27 percent on March 11 after leaders of the Senate Banking Committee announced their plan to eliminate the firms in a new bill.
Brown said the measure could allow for more concentration of too-big-to-fail banks. He said there could be simpler ways to replace Fannie and Freddie.
“The affordable housing standards issue and the duty to serve I think are important,” Brown said. “I don’t think they’re addressed in the way they should be. I think there is increasing sentiment I hear from people from all over the financial services sector, from Wall Street to community banks to credit unions, that say, ‘How is this going to work?’”
He also said he doesn’t see pressure from the White House to move legislation since Gene Sperling, the former director of the National Economic Council, left the Obama administration. “Now that Gene’s gone, I feel a little less interest in the White House.”
Brown said eliminating Fannie and Freddie may not be necessary. Hedge funds have lobbied Congress to re-capitalize the companies instead of winding them down.
“That this isn’t as broken as it was, or it isn’t as broken as people think it is, doesn’t mean we defend it, doesn’t mean we don’t improve it, but we don’t do something so complicated,” Brown said.
The senator questioned why large banks should be allowed to operate both in the physical and trading commodities market. The Federal Reserve is seeking comments by April 16 on the risks posed by bank ownership and trading of commodities such as oil, gas and aluminum by deposit-taking banks and the possible benefits of imposing capital standards.
The Fed’s action could increase pressure on Goldman Sachs Group Inc. to sell its commodities businesses. The issue was spurred by hearings conducted last year by Brown, who said banks shouldn’t be in this business.
“I just don’t know why it’s good for our economy that these institutions, these big financial institutions, need to be in this ballpark,” Brown said.
Brown is a possible future chairman of the banking panel. Johnson is retiring after the 2014 election, which may lead to Brown’s elevation should some Democrats opt for other panel slots and the Democrats retain majority control of the Senate.
Of the banking chairmanship, Brown said, “Sure, I’d like it, but it’s mostly out of my control.”