WSJ POLITICAL UPDATE
Fannie, Freddie Future Finds a Focus
By Nick Timiraos
16 June 2013
07:54 PM
The Wall Street Journal Online
Copyright 2013 Dow Jones & Company, Inc. All Rights Reserved.
Congress is gearing up to tackle an issue that Washington has mostly ignored for nearly five years: What to do with Fannie Mae and Freddie Mac, the bailed-out but now-profitable mortgage companies.
In the Senate, Republicans and Democrats have begun work on a bipartisan bill that would replace Fannie and Freddie within five years with a new "public guarantor" as part of a broader framework designed to wean the government back from its outsized role backstopping the nation's $10 trillion mortgage market.
The effort is being led by Sen. Bob Corker (R., Tenn.) and Sen. Mark Warner (D., Va.). So far, two other Republicans—Sens. Mike Johanns of Nebraska and Dean Heller of Nevada—and two other Democrats—Sens. Jon Tester of Montana and Heidi Heitkamp of North Dakota—are working on the bill. It hasn't been formally introduced.
In recent weeks, White House and Treasury officials have helped review drafts and provide technical and legal guidance on the Corker-Warner proposal, these people said. The administration's input doesn't necessarily imply support for this particular proposal alone, these people said. Instead, they view the cooperation as a positive sign of bipartisan interest to forge ahead on a long-stalled policy issue.
Serious discussions about the future of Fannie and Freddie faded quickly after the Obama administration issued a short "white paper" in early 2011 that sketched out three options for what could take the firms' place. Nearly all agree the status quo is untenable, but conservative Republicans have called for a private market with no new federal guarantees. Some moderate Republicans and many Democrats have said a federal role is needed to preserve liquid markets for the popular 30-year fixed-rate mortgage.
Fannie and Freddie don't make loans but instead buy them from lenders and package them as bonds. Their middleman role made more widely available the 30-year fixed-rate mortgage by matching banks and other lenders with investors, such as pension funds that are willing to manage the interest-rate risk associated with long-term, fixed-rate mortgages.
The White House has not advanced any proposal of its own, even though it has put together detailed plans over the past two years to preserve a federal role in the mortgage market, according to people familiar with internal deliberations. Officials concluded that releasing such a proposal without a stronger political consensus would be counterproductive because it would only rally opposition, these people said.
"The question is whether this is the long-awaited opening for serious bipartisan discussion on life after Fannie and Freddie. If it is, then it is an important step, whether it leads to law in the near term or not," said Jim Parrott, a senior fellow at the Urban Institute who served as a top White House housing-finance adviser until the end of last year.
Most political analysts give very low odds to the idea that Congress will pass a bill before next year's midterm elections, but the Senate discussions could determine whether anything can get done before the end of 2016.
The Corker-Warner bill, currently 129 pages long, would maintain a potentially significant federal role in the mortgage market by replacing Fannie and Freddie with a new system in which private entities would purchase mortgages from lenders and issue them to investors as securities.
The bill would allow private entities to purchase an explicit government guarantee to cover catastrophic losses on mortgages issued as bonds from a new guarantor, called the Federal Mortgage Insurance Corp. But the new issuers would first have to raise a significant amount of capital that would take all losses before the federal guarantee would be triggered. The new "FMIC" would oversee the broader market, much as the Federal Deposit Insurance Corp. regulates banks and provides deposit insurance to minimize bank runs.
"This is unfinished business that has been put off for far too long," said Mr. Corker. "It is time to put in place a housing finance system that moves beyond the current model of private gains and taxpayer losses." Added Mr. Warner: "There is bipartisan interest in getting this right. We are encouraged that all parties appear willing to come together to get something done."
The proposal is one of a handful that could be issued in the coming weeks. Sen. Jack Reed (D., R.I.) is said to be working on a separate bill that would create a similar framework but with one key difference: It would restructure—but not eliminate—Fannie and Freddie and use the refashioned companies, stripped of their federal charters and investment portfolios, to issue government-guaranteed securities.
It isn't clear when Mr. Reed will introduce the bill, which reflects an earlier proposal advanced by Jim Millstein, the former Treasury official who oversaw the restructuring of American International Group Inc., according to people familiar with the draft. A spokesman for Mr. Reed didn't respond to press inquiries.
Any proposal would have to overcome stiff resistance from House Republicans who have spent years arguing that government guarantees caused the housing crisis. An array of industry interests, from big Wall Street firms to local credit unions to homebuilders and real-estate agents, also has much at stake.
"If this is a baseball game, we're not even in the first inning. We're still taking batting practice, and there's a risk it will rain," said Charles Gabriel, a policy analyst at Capital Alpha Partners LLC in Washington.
The proposals are circulating ahead of Senate confirmation proceedings for Rep. Mel Watt, the North Carolina Democrat who was nominated last month by President Barack Obama to run the Federal Housing Finance Agency, which oversees Fannie and Freddie. His confirmation hearing is tentatively set for June 27, according to people familiar with the matter.
Some analysts and investors have said that the Corker-Warner proposal relies too heavily on arcane securities structures and that it isn't clear those structures would hold up well in a crisis. Reconfiguring Fannie and Freddie and subjecting them to more capital and tighter regulation "frightens me less than trying to devise a new way of guaranteeing mortgages," said Arnold Kling, a former Freddie Mac economist who said he would prefer no government role backstopping mortgages.
Animating the debate now is some lawmakers' fear that the urgency for any major revamp will wane as Fannie and Freddie, buoyed by a recovering housing market, make more money. Recent profits have led hedge funds and other investors to buy up the shares of both companies, which had traded at steep discounts until recently.
When the government took over Fannie and Freddie in 2008, it agreed to inject huge amounts of cash to keep them solvent. In exchange, the government has taken $188 billion in shares of "senior preferred" stock, and it also has warrants to acquire 79.9% of the firms' common stock.
The terms of Fannie and Freddie's bailout don't allow them to pay off any of the $188 billion that they owe, even though they will have returned $132 billion in dividends by the end of this month. All of their profits are sent to the Treasury as dividends, making it impossible for them to rebuild capital. Nonetheless, investors have bet that the firms will become so profitable that Congress and the administration will have little choice but to let some value flow back to shareholders.
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