A U.S. Senate plan for Fannie Mae and Freddie Mac, the most thorough yet for winding down the two mortgage financiers, faces a first test this week with its authors making last-minute changes to gather more support.
The 22 members of the Senate Banking Committee will decide as early as tomorrow if the bill, the culmination of more than a year of delicate negotiations among Democrats and Republicans, gains momentum or fizzles.
The legislation would replace the companies over five years with federal insurance for mortgage bonds that would kick in only after private investors were wiped out. Current shareholders of Fannie Mae and Freddie Mac would be in line behind the U.S. in getting any compensation from the wind-down.
To keep the bill from stalling, committee leaders are trying to win over at least a few of the half-dozen Democrats on the panel who haven’t publicly embraced it. They have proposed changes including ones that would prevent big banks from monopolizing the mortgage business and add stronger protections for lending in disadvantaged communities.
Even as the White House and industry groups including the National Association of Realtors are lobbying for quick action on the bill, civil-rights organizations and investors who would benefit from the continued existence of Fannie Mae and Freddie Mac are urging a delay. An impasse would leave the two companies operating indefinitely under federal control.
“None of us are going to get everything we want,” U.S. Housing and Urban Development Secretary Shaun Donovan said today on a conference call with reporters. “Unfortunately, there are some out there who are working hard to keep this from happening. They’re making a lot of money off the old system and doing everything they can to derail reform efforts.”
Restructuring the mortgage market is the largest piece of unfinished U.S. business from the 2008 credit crisis, when regulators seized Fannie Mae and Freddie Mac as they careened toward insolvency. The companies were bailed out with $187.5 billion from the Treasury while backing a growing share of mortgages as private capital dried up.
Only recently did they return to financial health, sparking calls from private shareholders including Bruce Berkowitz’s Fairholme Capital Management and hedge fund Perry Capital LLC to share in profits they are returning to taxpayers.
Six Democrats and six Republicans on the banking panel have previously endorsed the concept of the bill, written by Chairman Tim Johnson, a South Dakota Democrat, and its senior Republican, Mike Crapo of Idaho. That would be enough to move it out of the committee.
Still, Senate Majority Leader Harry Reid, a Nevada Democrat, is expected to allow a full Senate vote only if more party members come on board, said Isaac Boltansky, a policy analyst at Compass Point Research and Trading LLC in Washington.
Reid has expressed reservations about winding down Fannie Mae and Freddie Mac because the companies ensure that homebuyers are able to get affordable fixed-rate mortgages.
“Senate leadership appears far from enthused by the prospects of a floor vote on the measure,” Boltansky said in an interview. “Reforming the mortgage market just doesn’t fit into the pre-election priorities of either party.”
Johnson and Crapo will also have to ensure that any changes they make do not alienate Republicans.
“Leadership has to walk an incredibly fine line in order to secure the uncommitted liberal votes on the committee without eroding the right-leaning senators” who support the concept of the bill, Boltansky said.
Fannie Mae and Freddie Mac, long political flash points in Washington, buy mortgages from lenders and package them into securities on which they guarantee payments of principal and interest; they now back about two-thirds of new home loans.
That dominance has led them to post record profits over the past two years as the housing market rebounded. Fannie Mae reported an $84 billion profit for 2013, the highest-ever for the 80-year-old firm, while Freddie Mac likewise reported a record profit of $48.7 billion.
The two companies last week sent memos to the Banking Committee estimating that mortgage costs would go up as much as 219 basis points for some borrowers under the system created by the bill. Donovan criticized that analysis today on the call with reporters, calling it a “narrative that was crafted by companies that don’t compete in the competitive market.”
Other estimates, including one by Mark Zandi, chief economist at Moody’s Analytics Inc., have projected lower cost increases.
Freddie Mac Chief Executive Officer Donald Layton cast doubt on the need for the bill during a conference in Beverly Hills, California today.
“Even if there’s no legislation, the vast majority of risk will be going to the private sector,” Layton said, citing a growing number of securitizations in which Fannie Mae and Freddie Mac have been sharing risk with private investors.
The Johnson-Crapo bill is the most detailed congressional proposal on how the two companies would be liquidated and how the system that replaces them would operate. It also is the first to try to balance the Republican goal of heading off future taxpayer bailouts with the desire of Democrats to preserve broad access to the fixed-rate 30-year mortgage.
Fairholme and Perry Capital are pushing the U.S. to return the companies to private ownership, saying shareholders should benefit from their holdings. They have filed lawsuits challenging an arrangement in which the U.S. now keeps 100 percent of Fannie Mae and Freddie Mac’s profits as a return on the government investment. The bill says lawmakers would leave that decision to the courts.
Groups working on behalf of private investors have begun advertising and lobbying campaigns against the measure. Last month, the 60 Plus Association, an organization that receives funds from the industrialist Koch brothers, aired ads comparing the housing bill to Obamacare.
Shares of Fannie Mae closed April 25 in New York at $3.84, up 28 percent from $3.01 on Dec. 31. Freddie Mac closed at $3.90, a gain for the year of 35 percent.
While investors present their case, civil-rights groups maintain that the bill as written would make it harder for minority and low-income people to get loans. Their arguments have gained traction with Democrats including Sherrod Brown of Ohio, Elizabeth Warren of Massachusetts and Robert Menendez of New Jersey.
Community banks also have stepped in, pressing their Senate supporters for a provision that would keep big financial institutions from dominating all levels of mortgage finance. Johnson and Crapo have proposed adding language to prevent large banks from both originating and guaranteeing loans.
Among developments Reid will be gauging is the opinion of panel member Chuck Schumer of New York, the Senate’s third-ranking Democrat. Schumer hasn’t yet tipped his hand.
“We all know there is a majority in favor of the bill in the committee,” David Stevens, president of the Mortgage Bankers Association, said in an interview. “The question is how big the majority might get.”
If the bill clears the committee and the Democrat-dominated Senate, it would still have an uncertain path to law. When the Republican-controlled House takes up housing legislation, it’s likely to start with a bill introduced in the Financial Services Committee that would almost completely privatize the market. A House-Senate conference committee would then have to resolve differences, possibly producing a measure very different from either one now on the table.
None of that would happen if the Senate bill doesn’t get enough votes in committee to satisfy Reid. In that case, it would almost certainly be dead for the rest of the year. With Johnson stepping down as panel chairman and control of the Senate next year in doubt, the effort to remake the housing finance system probably would have to start over in 2015.
“In an election year, this is not a question of, ‘We’ve got months, we can work on it over the summer,’ ” Donovan said. It will be “very difficult” to persuade House Republicans to act on their bill if the full Senate doesn’t vote on Johnson-Crapo soon, he said.
Keeping the system in limbo indefinitely could be dangerous, said Karen Shaw Petrou, managing partner of Federal Financial Analytics Inc., a policy research group in Washington.
“The status quo is an effective nationalization,” of the mortgage market, she said. “It needs to be a considered policy decision, not an accident of history.”