WASHINGTON— Against a steady volley of criticism over plans to wind down Fannie Mae and Freddie Mac, top Obama administration officials defended a bipartisan bill to overhaul the mortgage-finance system as the best—and possibly only—chance to settle the firms’ fate 5½ years after their rescue.
The administration’s public push comes as the Senate Banking Committee on Tuesday will consider legislation to phase out the companies and replace them with a new system through which private firms could package mortgages into government-guaranteed securities. Analysts say the bill needs significant backing from the 22-member panel to have any chance of moving through the Senate ahead of this fall’s midterm elections.
“One shouldn’t wait until there’s a crisis to deal with this. We ought to deal with it now” before the next crisis, Treasury Secretary Jacob Lew said in an interview Monday. He called Fannie and Freddie “one of the last pieces of unfinished business” from the financial crisis and said, “the current system is one where the risk that taxpayers are bearing has never been priced properly and is open-ended.”
Fannie and Freddie—which don’t make loans but instead buy them from lenders and package them into securities that are sold to other investors—were rescued in September 2008 to prevent a wider housing-market collapse. There is no formal mechanism for the companies to exit government control absent an act of Congress or the Treasury Department, and if the bill falters, the companies’ government control would continue indefinitely.
The Senate bill, unveiled last month by committee leaders Tim Johnson (D., S.D.) and Mike Crapo (R., Idaho), marks a rare instance in which Republican and Democratic lawmakers are working closely with each other and the White House to craft legislation.
Still, critics say that the bill doesn’t necessarily solve the problems exposed by the 2008 crisis and that it could leave mortgage markets or taxpayers more exposed to booms and busts. “The system isn’t great right now, but it is functioning,” said Joshua Rosner, managing director at research firm Graham Fisher & Co.
Fannie and Freddie have returned to profitability over the past two years, and those profits have made it easier for a variety of groups to speak up in the firms’ defense. The companies have now paid $203 billion in dividends to the U.S. government, more than the $188 billion that the government injected.
Some industry groups are wary about steps that could raise borrowing costs. “It’s a highly risky situation to take a well-developed platform then replace it with one that is untested,” said Joel Singer, chief executive of the California Association of Realtors.
Small banks worry that the new setup offers a major power grab to the nation’s biggest banks, allowing them to control not only the production of mortgages but also the secondary market where loans are bought and resold. Liberal housing and civil-rights groups are afraid that replacing the firms would erode federal lending mandates to support affordable housing.
Meanwhile, hedge funds and other investors that have bought the firms’ shares for pennies on the dollar want to see the firms restructured but largely preserved as corporate entities, which could result in a huge payoff. Several investors have sued the Treasury, challenging bailout terms that require the firms to send all of their profits to the government indefinitely as restitution for the 2008 rescues. Several advocacy groups seeking to preserve shareholders’ rights have mobilized in recent weeks with TV and radio ads.
Shaun Donovan, secretary of the Department of Housing and Urban Development, dismissed critics as self-interested on Monday. “They are making a lot of money off the old system,” he said.
Fannie and Freddie aren’t allowed to lobby. In memos to their regulator that were made public last week after they were sent to lawmakers, they detailed concerns warning that the bill’s higher capital standards could sharply raise borrowing costs.
Mr. Donovan brushed off those estimates on Monday. He said they were “crafted by companies that don’t compete in the competitive markets, so we’ve got to view their conclusions through that prism.”
Tuesday’s Senate panel hearing will test whether a fragile coalition of centrists can hold together. They are seeking to attract more support from six uncommitted liberal Democrats, who have raised concerns that the bill wouldn’t do enough to ensure broad access to mortgages for low- and middle-income borrowers, without driving off Republicans, who are wary the government would underprice that support, putting taxpayers at risk of more losses.
“To get a bipartisan bill will require everyone asking, ‘Is it better than the current system?’ [and] not ‘Is it exactly what would you do if you wrote it by yourself?’ ” Mr. Lew said.
If the bill falters, it could become more likely that Fannie and Freddie are restructured rather than replaced. The Obama administration says it opposes that option because it says mortgage-market plumbing shouldn’t be controlled by firms that guarantee loans, which would make those firms too important to fail.
Even if the bill wins Senate approval, many analysts are dim about its prospects in the House, where conservatives have advanced a bill with no Democratic support.
Write to Nick Timiraos at nick.timiraos@wsj.com
