Senators Delay Action on Fannie Mae Amid Democrats’ Rift

Prospects for a bipartisan housing-finance overhaul dimmed as Democrats on a U.S. Senate panel
struggled to reach consensus on how to replace Fannie Mae (FNMA) and
Freddie Mac. (FMCC)

After a year of delicate bipartisan negotiations on a bill,
Democrats on the 22-member Senate Banking Committee remained
divided on issues including lending in disadvantaged
communities, big-bank dominance of the mortgage market and the
powers of a new regulator.

Senator Tim Johnson, the South Dakota Democrat who leads
the committee, and Senator Mike Crapo of Idaho, the top
Republican, yesterday postponed a vote on the housing measure
after negotiating its provisions late into Monday night. A
lobbying visit to the Senate floor Monday by U.S. Housing and
Urban Development Secretary Shaun Donovan also failed to produce
more commitments from the panel’s six undecided Democrats.

“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,” Oregon Democrat Jeff Merkley, who is among
the undecided, said in an interview. Merkley described himself
as “still in negotiations” with the bill’s sponsors.

The delay is a “bad sign” for enacting a housing-finance
overhaul while President Barack Obama is in the White House,
said Tim Rood, chairman of Washington-based housing-policy
consulting firm Collingwood Group LLC.

Closing Window

“I don’t think you’ll get anything done this
administration,” Rood said in a telephone interview. “This is
your window. After this, you’re going into a new election cycle
all over again.”

The Johnson-Crapo bill, the most thorough proposal yet for
remaking the housing-finance system, would replace the U.S.-
owned companies over five years 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. in getting any compensation
from the wind-down.

The measure has the backing of six Democrats and six
Republicans on the 22-member committee. It needs more support
from Democrats before Senate Majority Leader Harry Reid, a
Nevada Democrat, will allow the full Senate to vote on it.

“I am not an expert on Fannie and Freddie, especially with
all the suggested changes so I’m not committing to anything,”
Reid said in an interview. “I’ll be happy to have an open
mind.”

Seeking Changes

Senators including Merkley, Chuck Schumer of New York and
Elizabeth Warren of Massachusetts are seeking changes such as
stronger protection for lending in disadvantaged communities and
greater limits on the ability of large banks to dominate the
origination and securitization of mortgages.

Schumer is seeking automatic increases in the size of loans
that qualify for government backing in high-cost areas including
New York. Other senators are divided over the scope of a
proposal by Kansas Republican Jerry Moran that would exempt some
banks from scrutiny by the new regulator created by the bill,
the Federal Mortgage Insurance Corp.

“While I do not relish the idea of a short delay, I am
pleased that a number of senators believe that with just a short
period of additional time to consider it, they will have the
opportunity to productively join us,” Crapo said at a hearing
yesterday.

‘More Conversation’

Senator Bob Corker, a Tennessee Republican who introduced a
preliminary version of the bill in June, said panel members
worked until “very, very late” Monday to try to resolve
differences.

“We’re going to have a little more conversation,” Corker
said yesterday in an interview. “We’ve sort of narrowed them
down into a very small group of points that could potentially
bring a lot more members on.”

If there is no vote before the Senate leaves for the summer
recess in July, the bill is probably dead. With Johnson stepping
down as chairman and control of the Senate in doubt ahead of
November elections, the effort to remake the housing finance
system probably would have to start over in 2015.

Restructuring the mortgage market is the largest piece of
unfinished U.S. business from the 2008 credit crisis, when
regulators seized Fannie Mae and Freddie Mac as they careened
toward insolvency. The companies, which buy mortgages and
package them into securities, were bailed out with $187.5
billion from the Treasury while backing a growing share of
mortgages as private capital dried up.

Financial Turnaround

Only recently did they return to financial health, sparking
calls from private shareholders including Bruce Berkowitz’s
Fairholme Capital Management and hedge fund Perry Capital LLC to
share in profits they are returning to taxpayers.

Fairholme and Perry Capital are pushing the U.S. to return
the companies to private ownership, saying shareholders should
benefit from their holdings. They have filed lawsuits
challenging an arrangement in which the U.S. now keeps 100
percent of Fannie Mae and Freddie Mac’s profits as a return on
the government investment. The bill says lawmakers would leave
that decision to the courts.

An organization funded by Berkowitz, Americans United for
Homeownership, yesterday began running newspaper and television
ads saying lawmakers should be “preserving and strengthening”
Fannie Mae and Freddie Mac.

Shares of Fannie Mae rose to $3.92 at the close of trading
in New York, up 3 percent from $3.80 at Monday’s close and 30
percent from $3.01 on Dec. 31. Freddie Mac closed at $3.97, a
gain of 3 percent from Monday’s close and 37 percent for the
year.

To contact the reporters on this story:
Clea Benson in Washington at
cbenson20@bloomberg.net;
Cheyenne Hopkins in Washington at
chopkins19@bloomberg.net

To contact the editors responsible for this story:
Maura Reynolds at
mreynolds34@bloomberg.net
Anthony Gnoffo


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