Posted on Thursday, November 4, 2010
House Republicans have made punching bags of Fannie Mae and Freddie Mac, criticizing the federal bailout of the mortgage giants and promising to end the government’s longstanding use of the companies to reduce the cost of mortgage loans.
But the Republican takeover of the House could make that goal more difficult to achieve.
Until now, Democrats have been solely responsible for the fates of Fannie and Freddie and, in the current political climate, even longtime allies like Representative Barney Frank of Massachusetts have agreed that the companies must go.
But the Obama administration wants to replace Fannie and Freddie with some new form of federal subsidy. And that means Republicans and Democrats now face a choice: compromise, or stand firm and try to blame the other party.
There are powerful reasons to expect that speechmaking will eventually yield to deal-making. Most experts agree that Fannie and Freddie should not survive. The failure to act could anger voters. And something must be done by the end of 2012, when current law requires the government to end its support for the companies.
But House Republicans campaigned on the repeated promise to liquidate the companies, and to allow nothing similar to take their place.
Some Democrats, meanwhile, say privately that they do not mind the status quo. The companies are serving their purpose, making sure that families get mortgage loans. Meanwhile, government ownership means the companies are no longer free to chase after profits, which is how they got into trouble.
Brian Gardner, a political analyst for the investment bank Keefe, Bruyette & Woods “The gap between Treasury and House Republicans is going to be pretty wide. It seems to me we’re in a gridlock state probably for the next two years. I think we’re going to be talking a lot about Fannie and Freddie, I just don’t see an end game.”
Leading House Republicans have been unequivocal in their demands for the government to sever ties with Fannie Mae and Freddie Mac. Representative Spencer Bachus, the Alabama Republican who is likely to become chairman of the Financial Services Committee, has expressed support for legislation that would require the government to start the process immediately.
In a recent interview with CNBC, he said that the loss of government subsidies for mortgages might be painful for borrowers but was necessary. “Right now there is an addiction to government funding and we have to break that addiction,” Mr. Bachus said in the interview. “With any addiction there is a long withdrawal process, but you have to start and you have to start now.”
Some analysts doubt Republicans will sustain this hard line. Powerful constituencies, including the national associations of real estate agents and home builders, have publicly called for the government to maintain a role in housing finance. So have many leading figures in the mortgage industry.
“I would think that it is in nobody’s interest to let this fester, either for financial market reasons or for political ones,” said Karen Shaw Petrou, managing partner of Federal Financial Analytics, which tracks political issues for financial industry clients.
The Obama administration, for its part, has said repeatedly that the companies should be replaced. Legislation passed earlier this year requires the administration to present Congress with a proposal by January. While the details remain under consideration, one much-discussed possibility is a new form of government insurance, in which lenders would pay the government to absorb catastrophic losses.
Both sides have shown a willingness to delay the debate, expressing a common concern for stability in the housing market. The government, mostly through Fannie and Freddie, backs more than 90 percent of new mortgage loans. As a result, calls for change are often accompanied by acknowledgments that now may not be the moment.
The improving health of the two companies could also diminish the sense of urgency. Freddie Mac reported Wednesday that it lost $4.1 billion in the third quarter. The company said it needed $100 million in new federal support, increasing the total cost of its bailout to $64.2 billion. The new request, however, is minuscule in comparison to past quarters, buttressing a recent federal report that found the bailout of the companies may be substantially complete. Fannie Mae will report earnings on Friday.
All of this has convinced some observers that the mortgage industry is not likely to be transformed by Washington, at least not for the next several years.
“I think the market has in general been pretty consistent in looking past the headline risk of this to the fundamental constancy of mortgages and mortgage finance in the United States,” said Jeremy Diamond, managing director of Annaly Capital Management, a leading investor in mortgage securities. “I wouldn’t call the market sanguine, I would just call it realistic.” NYTBy BINYAMIN APPELBAUM