(Bloomberg)—In a bitterly partisan Congress, two senators are making a rare push across party lines to solve a persistent riddle with huge implications for the U.S. housing market: What to do with Fannie Mae and Freddie Mac?
Aides to Tennessee Republican Bob Corker and Virginia Democrat Mark Warner have begun meeting with industry groups and former government officials to discuss ideas, according to people familiar with the matter. Senate Banking Committee Chairman Mike Crapo, whose panel would have to shepherd any bill to overhaul the mortgage finance giants, has also begun to hold housing-finance briefings with the idea of building toward a compromise.
A Fannie-Freddie fix, promised since they were seized by regulators in 2008 and sustained with $187.5 billion in Treasury funds, has taken on increased urgency as the companies face the threat of needing more aid. Under the terms of their bailout, they can’t retain any capital starting next year, meaning taxpayers would have to cover any losses.
Success for Corker and Warner is far from assured. They were behind a failed attempt in 2014 to end the status of Fannie and Freddie as wards of the state. Many Republicans would rather see the companies killed off than have them continue buying mortgages with government backing. And hedge funds that own Fannie and Freddie shares are eager to get access to their billions of dollars in profits, meaning they’re highly motivated to try to influence any legislation.
“It is incredibly difficult to imagine that any legislative reform of significance is going to be enacted in this Congress,” said Isaac Boltansky, a policy analyst with Compass Point Research & Trading.
A bill is not close, and ultimately Crapo himself could take the lead on legislation. The Trump administration, while calling housing-finance reform a priority, hasn’t yet given an indication of what direction it wants to go, and if it takes a strong view, that could upend whatever course lawmakers settle on.
“Housing finance reform is a high priority for myself and the American people,” Crapo said in a statement. The Idaho Republican added that he is working will all members of the committee “to get the process started to reach a bipartisan solution for our broken housing finance system.”
Spokeswomen for Warner and Corker declined to comment.
Fannie Mae’s common shares fell 25 cents, or 0.95 percent, to $2.62 as of 10:03 am in New York, while Freddie’s stock declined 20 cents, or 0.8 percent, to $2.49.
Fannie and Freddie, which back about 40 percent of the nation’s home loans, have been under U.S. control since they suffered significant losses in 2008. They are now profitable again and required to turn all their earnings over to Treasury.
The two companies don’t make loans themselves, but buy them from lenders, wrap them into securities and sell them to investors with protection against homeowner defaults. They now guarantee more than $4 trillion in mortgage-backed securities and are responsible for setting the standards on about four of every 10 mortgages.
The earlier Corker-Warner legislation, which became a bill sponsored by Crapo and then-Banking Committee Chairman Tim Johnson, would have wound down Fannie and Freddie and replaced them with a new system. Critics argued that the bill would have led to higher mortgage rates and didn’t do enough to help low-income borrowers. Shareholders, who are engaged in a legal battle with the government over the companies’ profits, also opposed the measure because it could have resulted in them getting little value from their investments.
Dozens of Banking Committee staffers have begun to get briefings on housing-finance issues over the past few weeks. Among those delivering the briefings are former policy makers who in the past year have released plans for overhauling the system.
Most recently, the Mortgage Bankers Association suggested turning Fannie and Freddie into privately-owned utilities with a capped rate of return and strict capital standards. A proposal released last year by authors including former Obama White House officials would merge the two companies into a government-owned corporation. Another plan offered by ex-Federal Housing Finance Agency Director Edward DeMarco and former Corker staffer Michael Bright would make them mutual companies, owned by lenders, that would sell insurance against defaults instead of buying and securitizing mortgages.
Bright said lawmaker inquiries have picked up significantly over the past month. He said he doesn’t anticipate a near term bill but that the groundwork and teams being formed now could have a big impact on what gets introduced when lawmakers are ready to move.
To that end, the plans being briefed do have some attributes in common. Most call for Fannie and Freddie or successors to transfer mortgage-credit risk to the private market. They also would require capital levels far above what the companies had before the crisis.
On the other hand, the proposals differ over who should own the companies or what entities should control the process of packaging mortgages into bonds. Fannie and Freddie have sold some mortgage-credit risk to private investors over the past few years, but critics say they have gotten poor prices and that the transfers are less effective than capital would be in protecting the companies against losses.
Some shareholders and lawmakers have said that efforts to make wholesale changes to the housing finance system are unnecessary and rife with risk. Investors such as Bill Ackman of Pershing Square Capital Management and Bruce Berkowitz of Fairholme Capital Management, whose stakes could be wiped out if Fannie and Freddie are shut down, have said the current system could remain mostly in place, albeit with greater capital requirements and tighter regulation.
One hurdle to reaching agreement on new legislation is solving the riddle of what sunk the last bill. The prospect of losing Fannie’s and Freddie’s affordable housing mandates brought fierce opposition from some Senate Democrats and progressive-leaning groups. The recent proposals keep the mandates, but some fear the goals would be torn out during the legislative process.
Another worry is that a loss leading to the need for more taxpayer money by Fannie or Freddie could trigger a hasty bill that eliminates them, said John Taylor, president of the National Community Reinvestment Coalition.
Still, the senators’ work could begin to frame the debate. The Trump administration is struggling to fill political positions at the Treasury Department, which is taking the lead on Fannie and Freddie. Craig Phillips, counselor to Treasury Secretary Steven Mnuchin, has met several times with authors of some housing-finance proposals over the past few weeks.
Mark Calabria, who is chief economist for Vice President Mike Pence, said in a speech last week that the Trump administration has a working group to develop housing finance principles, but no plan is imminent.
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