Posted on Thursday, March 17, 2011
Republican lawmakers are preparing this week to introduce a series of legislative proposals to gradually reduce the role of Fannie Mae and Freddie Mac.
The effort represents a tactical shift from the comprehensive approach for a speedier wind-down of the mortgage-finance giants that Republicans backed during last year's negotiations on the Dodd-Frank Act.
That legislation would have started cutting the government's ties to the mortgage giants or begin winding them down in two years. The bill's sponsor, Rep. Jeb Hensarling (R., Texas), has said he still plans to reintroduce his legislation later this year, and leading House Republicans say they are still committed to the goal of winding down Fannie and Freddie and handing their role over to the private sector.
The decision to take a piecemeal approach with individual bills reflects the challenge in forging a political consensus—even among Republicans—around overhauling the nation's housing-finance infrastructure. And as the housing market continues to be vulnerable, deep caution greets any proposal that might pass on higher borrowing costs to consumers.
If Republicans advance individual bills, that could offer more opportunities for cooperation with the White House than if they advance a single bill outlining a more immediate wind-down of Fannie and Freddie.
Rep. Scott Garrett (R., N.J.), who heads the House subcommittee on capital markets, plans to unveil some of those bills on Tuesday. One measure would accelerate the wind-down of the firms' combined $1.5 trillion mortgage portfolios, which are already set to decline by 10% annually. Other bills would eliminate the firms' federal affordable-housing goals and gradually raise the guarantee fees that Fannie and Freddie charge lenders, a decision now made by the firms and their federal regulator.
Some of these ideas were embraced by the White House in its "white paper" released last month.on the future of housing finance For example, the White House advocated raising guarantee fees to help bring private capital back to the mortgage market. The Obama administration has said it hopes to have legislation addressing Fannie and Freddie within the next two years, but it hasn't provided a more specific timetable for any overhaul.
The moves also come amid a long-standing political fight. Democrats faced heavy criticism last year from Republicans for excluding Fannie Mae and Freddie Mac from their sweeping financial-regulatory overhaul. Now, with Republicans controlling the House of Representatives, Democrats are tagging that position as posturing.
"The Republicans have pretended for a while that they knew what to do," said Rep. Barney Frank (D., Mass.). "Now that they have to govern, they're not sure." Mr. Frank says the Republican leadership "doesn't have the votes" for a more immediate overhaul. In a statement, a spokesman for Mr. Garrett said he is committed to "protecting taxpayers and getting private capital off the sidelines."
Republicans say individual bills have a better chance at forcing the Democratic-led Senate to take up Fannie and Freddie. GOP lawmakers say they're concerned the impetus for overhaul could weaken as the housing market settles out and the memory of Fannie and Freddie's collapse fades. That view was echoed by Treasury Secretary Timothy Geithner at a hearing earlierthis month.
"What we're trying to do as a team here is figure out the best strategy to get the ball moving," said Rep. Randy Neugebauer (R., Texas). One key question is whether "you can get a comprehensive bill passed," he said. "Part of being in leadership is making sure when you bring policy ideas forward, that you've got the ... votes to pass it."
Last month's White House proposal called for gradually phasing out Fannie and Freddie and offered three options for what might follow them. The first option, which is supported by many conservative Republicans, would provide no loan guarantees to protect mortgage investors beyond those made by existing agencies such as the Federal Housing Administration.
The second option would create some type of government backstop that would kick in only in market emergencies. The third would create new federal loan guarantees to replace some of the roles played by Fannie and Freddie and enjoys support from a cross section of consumer groups and the real-estate and banking industries. Many Democrats, and some Republicans, have indicated their preference for such a model.
Winding down Fannie and Freddie will be tricky: They guarantee around $5 trillion of mortgages and, together with federal agencies, are responsible for backing around nine in 10 new mortgages. Any of the options are likely to raise borrowing costs, and that could make lawmakers reluctant to taking action now given the fragility of the housing market, says Brian Gardner, a policy analyst at Keefe Bruyette & Woods. He says there's little chance that Congress and the White House will agree on a bill before the 2012 election.
Republicans have argued that a fully private mortgage market will leave taxpayers less exposed to mortgage losses. "There's more market discipline in the system," said Mr. Neugebauer. "People are going to be paying more attention to the underlying mortgages."
Others say the risks assumed by Fannie and Freddie could simply move into the federally-insured banking sector or federal loan agencies and that taxpayers would still be exposed to losses in a crisis. "It looks like it's a more private solution, but it may not be in the end," Mr. Geithner said at a House hearing earlier this month.
By NICK TIMIRAOS, THE WALL STREET JOURNAL