Senators Delay Action on Fannie Mae Amid Democrats’ RiftCheyenne Hopkins and Clea Benson
Prospects for a bipartisan housing-finance overhaul dimmed as Democrats on a U.S. Senate panel struggled to reach consensus on how to replace Fannie Mae and Freddie Mac.
After a year of delicate bipartisan negotiations on a bill, Democrats on the 22-member Senate Banking Committee remained divided on issues including lending in disadvantaged communities, big-bank dominance of the mortgage market and the powers of a new regulator.
Senator Tim Johnson, the South Dakota Democrat who leads the committee, and Senator Mike Crapo of Idaho, the top Republican, yesterday postponed a vote on the housing measure after negotiating its provisions late into Monday night. A lobbying visit to the Senate floor Monday by U.S. Housing and Urban Development Secretary Shaun Donovan also failed to produce more commitments from the panel’s six undecided Democrats.
“If we don’t get this right, we’ll create major disturbances in the housing market which will have a profound impact on families, on homeownership and certainly on our national economy,” Oregon Democrat Jeff Merkley, who is among the undecided, said in an interview. Merkley described himself as “still in negotiations” with the bill’s sponsors.
The delay is a “bad sign” for enacting a housing-finance overhaul while President Barack Obama is in the White House, said Tim Rood, chairman of Washington-based housing-policy consulting firm Collingwood Group LLC.
“I don’t think you’ll get anything done this administration,” Rood said in a telephone interview. “This is your window. After this, you’re going into a new election cycle all over again.”
The Johnson-Crapo bill, the most thorough proposal yet for remaking the housing-finance system, would replace the U.S.- owned 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.
The measure has the backing of six Democrats and six Republicans on the 22-member committee. It needs more support from Democrats before Senate Majority Leader Harry Reid, a Nevada Democrat, will allow the full Senate to vote on it.
“I am not an expert on Fannie and Freddie, especially with all the suggested changes so I’m not committing to anything,” Reid said in an interview. “I’ll be happy to have an open mind.”
Senators including Merkley, Chuck Schumer of New York and Elizabeth Warren of Massachusetts are seeking changes such as stronger protection for lending in disadvantaged communities and greater limits on the ability of large banks to dominate the origination and securitization of mortgages.
Schumer is seeking automatic increases in the size of loans that qualify for government backing in high-cost areas including New York. Other senators are divided over the scope of a proposal by Kansas Republican Jerry Moran that would exempt some banks from scrutiny by the new regulator created by the bill, the Federal Mortgage Insurance Corp.
“While I do not relish the idea of a short delay, I am pleased that a number of senators believe that with just a short period of additional time to consider it, they will have the opportunity to productively join us,” Crapo said at a hearing yesterday.
Senator Bob Corker, a Tennessee Republican who introduced a preliminary version of the bill in June, said panel members worked until “very, very late” Monday to try to resolve differences.
“We’re going to have a little more conversation,” Corker said yesterday in an interview. “We’ve sort of narrowed them down into a very small group of points that could potentially bring a lot more members on.”
If there is no vote before the Senate leaves for the summer recess in July, the bill is probably dead. With Johnson stepping down as chairman and control of the Senate in doubt ahead of November elections, the effort to remake the housing finance system probably would have to start over in 2015.
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, which buy mortgages and package them into securities, 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.
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.
An organization funded by Berkowitz, Americans United for Homeownership, yesterday began running newspaper and television ads saying lawmakers should be “preserving and strengthening” Fannie Mae and Freddie Mac.
Shares of Fannie Mae rose to $3.92 at the close of trading in New York, up 3 percent from $3.80 at Monday’s close and 30 percent from $3.01 on Dec. 31. Freddie Mac closed at $3.97, a gain of 3 percent from Monday’s close and 37 percent for the year.