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Fannie Mae Fix Fades as Senate Democrats Split on Mortgage Plan

JAN 31, 2014 12:06pm ET
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Chances that Congress will move this year to wind down or transform Fannie Mae and Freddie Mac are dimming as lawmakers confront a split among Senate Democrats and a change at the regulator of the mortgage finance companies.

A delay would mean Paulson & Co., Fairholme Capital Management LLC and others who have been acquiring stock in the government-owned companies may have to wait a year or more to learn whether Congress will preserve some value for private shareholders or wipe out their holdings.

This year’s window for a housing overhaul is closing as the leaders of the Senate Banking Committee—chairman Tim Johnson, a South Dakota Democrat, and Mike Crapo of Idaho, the ranking Republican—work to complete a bill before members are distracted by the midterm elections.

The panel’s Democrats remain at odds. Elizabeth Warren of Massachusetts and Sherrod Brown of Ohio have said they won’t back a plan unless it guarantees affordable loans for most buyers. Sen. Mark Warner, a Virginia Democrat, said expanding the bill’s scope too much could undermine bipartisan support.

“What the administration and the chairman and the others have to resist is trying in the Senate to move the bill too much to the left,” Warner said at a Jan. 8 housing forum in Washington.

Consumer and housing advocates say there is less urgency for a bill because the new head of the Federal Housing Finance Agency, former Democratic congressman Melvin Watt, can enact some policies aiding homeowners without legislation. They are pushing Democrats friendly to their cause to hold out for a measure that would ease credit for home buyers in all income groups and help for low-income renters in multifamily homes.

In the absence of congressional action, the federal government will continue to guarantee most home loans, providing a source of support to the mortgage market.

Reaching agreement on the future of Fannie Mae and Freddie Mac, which buy mortgages and package them into bonds, has been one of the central challenges of Washington’s response to the 2008 credit crisis. The government-chartered companies have long been political flash points, praised for expanding homeownership and then reviled for accounting scandals, for accelerating the subprime mortgage meltdown and for prompting a taxpayer bailout.

U.S. regulators seized Fannie Mae and Freddie Mac in 2008 as their losses on soured loans pushed them to the brink of insolvency. They were subsequently propped up by $187.5 billion in government aid.

While President Obama proposed winding down Fannie Mae and Freddie Mac three years ago, he didn’t release a detailed plan. In the meantime, the companies, which still guarantee about 60% of new U.S. home loans, began posting record profits in 2012 as the housing market rebounded. They have paid billions to the Treasury as dividends.

Their preferred shares have quintupled in price over the past year as investors speculate the notes will have value when the future of the companies is finally decided. Bill Ackman’s $12 billion hedge fund, Pershing Square Capital Management LP, said on Nov. 15 it bought almost 10 percent each of the available common shares of Fannie Mae and Freddie Mac.

Fairholme, Perry Capital, and other shareholders have sued the U.S. government, contending that investors deserve some of the money being generated by Fannie Mae and Freddie Mac.

Congressional efforts have focused on replacing the two companies with a system in which mortgages are mostly backed by private capital. The government would play a smaller role in the market by taking a backstop position on mortgage securities, stepping in only if private interests were wiped out by catastrophic losses.

Hedge funds have lobbied to privatize the companies instead of liquidating them so their investments aren’t worthless. No lawmaker has yet come out in public support of that idea. “My view that these shareholders likely won’t get a dime has not changed—except possibly for small remnants, if there are any left, once reform is finished,” Sen. Bob Corker, a Tennessee Republican on the banking panel, said Jan. 10.

In the Republican-controlled House of Representatives, a bill that would almost entirely privatize the mortgage market, written by Texas Republican Jeb Hensarling, hasn’t gained enough support for a vote of the full chamber.

That leaves Senate Banking as the probable driver of an overhaul. Even with some Republican votes, it’s unlikely a bill could clear the panel without a majority of its Democrats.

“To get the progressive wing of the Democratic party you have to convince them that the legislation is going to provide for multifamily housing finance and offer a path to homeownership for lower-income consumers,” said Jaret Seiberg, policy analyst at Guggenheim Securities LLC’s Washington Research Group.

Still, Seiberg said, if such measures greatly expand the U.S. role in low-income housing, Republican support could erode. A Senate bill that doesn’t include backers from both parties would have little chance of gaining acceptance in the House.

“The more you move to the left the more you risk losing the right,” Seiberg said. “That’s why this bill has always been a giant balancing act.”

The split among Senate Democrats was on display after Warner made his Jan. 8 comments. In a posting on the political blog dailykos.com, Mike Lux, leader of the activist group American Family Voices, said Warner’s remarks were “classic playing of the DC centrism card to promote a bill that will benefit Wall Street bankers a lot but will do serious harm to middle- and working-class families.”

Lux’s group has been the beneficiary of fundraising appeals from Warren. Warren, along with Brown and Bob Menendez of New Jersey, declined to sponsor a mortgage-finance bill that Warner and Corker introduced last year and which is serving as the model for the measure that Crapo and Johnson are writing.

Warren said she is pushing for deeper government backing for the housing market and assurances that low-income borrowers and small lenders won’t be shut out.

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