Senators want to move forward with Fannie Mae, Freddie Mac reform

A bipartisan group of senators want to largely eliminate Fannie Mae and Freddie Mac as part of an overhaul of the mortgage finance market.

Although legislation isn’t imminent, senators and industry representatives have signaled they are closing in on a broad framework that would wind down and eventually end the government-backed mortgage giants.

{mosads}While details are still being hashed out, the basic premise is that the government’s role in the housing finance market would be reduced in favor of more private capital during a transition that is expected to take several years.

“Obviously we’re discussing lots of options but I don’t know of anybody that’s working on an option where Fannie and Freddie are what they are today,” Sen. Bob Corker (R-Tenn.) told The Hill.

“No one is looking to re-IPO [initial public offering] them or anything else.”

Corker said that talks are ongoing and “there have been a lot of very fruitful discussions”

While reforms of the mortgage industry is far from the forefront of the legislative agenda, there are some indications that it has a pulse.

Sen. Mike Johanns (R-Neb.), a member of the Senate Banking Committee, last week during a hearing said he believed “a bipartisan consensus” was emerging that the status quo for Fannie and Freddie was unacceptable.

“A nationalized housing market with an implicit government guarantee I would argue is not good government,” he said.

If Congress rallies around an approach to at least reduce the government’s role, it would probably squash the efforts of hedge fund investors who are betting that lawmakers will allow Fannie and Freddie to exit conservatorship with a structure similar to their current form and buying up preferred stock issued by the entities before they came under government control during the financial crisis in 2008. 

Given Fannie and Freddie’s role in the financial crisis, David Stevens, head of the Mortgage Bankers Association (MBA), characterized those efforts as putting “the wolves back into the pen with the sheep after the slaughter we just went through.”

“It won’t pan out for them,” he told The Hill.

A more likely outcome would see Fannie and Freddie replaced with a new entity that is smaller and more contained, but that would still allow government guarantees on some loans. A few different plans being discussed on Capitol Hill move in that general direction.

Overall, Fannie and Freddie own or guarantee about half of all U.S. mortgages worth about $5 trillion.

Investors in those mortgages hope Fannie and Freddie’s improving financial situation will create inertia among lawmakers and keep Fannie and Freddie in place.

Fannie recently announced that it would send $59.4 billion in dividends to the Treasury, while Freddie added $7 billion to the government’s coffers.

Under a bailout agreement, the dividends do not pay down the $188 billion taxpayer debt. But, if counted, Fannie and Freddie would have paid down about 80 percent of its bailout, so far.

But pro-reform senators say they remain undeterred.

Sen. Mark Warner (D-Va.), a member of the Senate Banking Committee, told The Hill that regardless of the circumstances “I think it’s important to do reform” and that he would have “more to say on that soon.”

Rhode Island Democratis Sen. Jack Reed said the Banking panel continues to work on a plan forward and he doesn’t foresee Fannie’s and Freddie’s profitability hampering those efforts.

As a framework gradually emerges to rebuild the mortgage market, Stevens said that a legislative solution must be weighed carefully with the crafting of regulations so that new rules, such as stiffer requirements on risk retention and capital requirements, don’t stifle private investors that want back into the mortgage market.

Stevens said a wind-down must be done right to ensure that the balance tips away from a system that is “beholden” to the government guarantee to the private market.

Johanns said lawmakers need to determine the level of risk sharing, the amount of private capital and the percentage of the government guarantee as they move forward.

Regardless, any overhaul must be done so as to not send the fragile, yet recovering economy, into a downward spiral, Stevens said.

“We can’t shut it down overnight,” he said.