Warren and Allies Said to Reject Fannie Mae Overhaul Bill

The Senate Banking Committee is preparing to vote next week on a plan to replace government-owned mortgage firms Fannie Mae and Freddie Mac as fading Democratic backing for the measure dims its chances of becoming law.

Six Democrats whose support is crucial agreed in a private meeting yesterday that they wouldn’t vote for the bipartisan proposal to replace the finance companies with a government re-insurer, according to three people familiar with the meeting.

The six senators -- Elizabeth Warren of Massachusetts, Charles Schumer of New York, Sherrod Brown of Ohio, Jeff Merkley of Oregon, Robert Menendez of New Jersey and Jack Reed of Rhode Island -- agreed that the measure needed major revisions: The structure of the re-insurer seemed unworkable and the bill lacked sufficient support for affordable housing goals. Changing the bill to address those concerns could weaken Republican support for the bill.

The overhaul is “effectively dead until 2015,” said Isaac Boltansky, a policy analyst at Compass Point Research and Trading LLC in Washington.

Senate Banking Committee Chairman Tim Johnson, a South Dakota Democrat, and Senator Mike Crapo of Idaho, the top Republican on the panel, have the backing of six Democrats and six Republicans on the 22-member committee. However Senate Majority Leader Harry Reid has said the bill needs to attract more support from Democrats, who hold a slim majority in the chamber, before he will bring it to the floor for a vote.

‘Highly Doubtful’

“The Johnson-Crapo package will still likely clear the committee, but without any of the six targeted Democrats signing on it is highly doubtful that the measure will get a floor vote,” Boltansky said.

Shares of Fannie Mae rose to $4.24 at 10:30 a.m. in New York, up 2 percent from $4.16 at Thursday’s close and 41 percent from $3.01 on Dec. 31. Freddie Mac was trading at $4.15, a gain of 1 percent from Monday’s close and 43 percent for the year.

A delay in winding down the companies could benefit stockholders including Bruce Berkowitz’s Fairholme Capital Management, hedge fund Perry Capital LLC, and Bill Ackman’s Pershing Square Capital Management LP. Ackman, whose firm holds about 11 percent of Fannie Mae and Freddie Mac’s outstanding common shares, said May 5 that the stock could be worth $23 to $47 a share over time.

Making Money

Fannie Mae and Freddie Mac, which buy loans and package them into securities, were taken into U.S. conservatorship in 2008 and received a $187.5 billion taxpayer bailout. They’ve since returned to profitability. Fannie Mae on Thursday reported net income of $5.3 billion for the three months ended March 31. Freddie Mac reported earnings of $4 billion for the period.

Sean Oblack, a spokesman for Johnson, said yesterday that the senator would continue to seek more support for the bill.

“We have made significant progress bridging the divide among those previously undecided, and the committee vote is just a first step,” Oblack said in a statement. “Those involved in the negotiations have indicated they are interested in continuing to work together to try and find common ground, so the Banking Committee will keep working after favorably reporting out the bill next week.”

Senator Bob Corker, a Tennessee Republican who helped draft an early version of the plan, said in a May 7 interview that adequate support for the bill was uncertain.

Support Uncertain

“We know we have the votes to pass it out of committee,” Corker said. “The question is, can we broaden support? I don’t think we can say yet how that’s going to work out.”

The bill 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 would rely 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 be served.

In recent weeks, the bill’s backers had courted Warren for her support, said two of the people. Warren has previously said that any housing measure needed to include explicit affordable housing goals, not just incentives.

Affordable Housing

“The affordable housing standards issue and the duty to serve I think are important,” Brown said at a Bloomberg breakfast last month. “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?’”

The Johnson-Crapo bill would phase out Fannie Mae and Freddie Mac over a five-year period and replace them 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. government in getting any compensation from the wind-down.

The bill is based on a framework introduced last year by Corker and Mark Warner, a Democrat from Virginia.

“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,” Merkley said in an interview on April 29.