Six Democrats whose support is crucial to a U.S. Senate plan to replace government-owned mortgage firms Fannie Mae and Freddie Mac have decided they won't support the proposal without major revisions, dimming its chances of becoming law this year.
The lawmakers agreed in a private meeting yesterday that they wouldn’t support the bipartisan proposal to replace the finance companies with a government re-insurer, according to three people familiar with the meeting. A lack of Democratic consensus scuttled plans last week to approve the bill by the Senate Banking committee, whose chairman yesterday vowed to continue seeking votes.
The six senators—Charles Schumer of New York, Sherrod Brown of Ohio, Jeff Merkley of Oregon, Robert Menendez of New Jersey, Elizabeth Warren of Massachusetts, and Jack Reed of Rhode Island—agreed that the structure of the re-insurer seemed unworkable and the bill lacked sufficient support for affordable housing goals. Such changes could weaken Republican support for the measure.
"The Johnson-Crapo package will still likely clear the committee, but without any of the six targeted Democrats signing on it is highly doubtful that the measure will get a floor vote," said Isaac Boltansky, a policy analyst at Compass Point Research and Trading in Washington. The overhaul would be "effectively dead until 2015," he said.
Senate Banking Committee Chairman Tim Johnson, a South Dakota Democrat, and Senator Mike Crapo of Idaho, the top Republican on the panel, have the backing of six Democrats and six Republicans on the 22-member committee. However, Senate Majority Leader Harry Reid has said the bill needs to attract more support from Democrats, who hold a slim majority in the chamber, before he will bring it to the floor for a vote.
Sean Oblack, a spokesman for Johnson, said yesterday that the senator expects the bill to be approved by the committee and would continue to seek more support.
"We have made significant progress bridging the divide among those previously undecided, and the committee vote is just a first step," Oblack said in a statement. "Those involved in the negotiations have indicated they are interested in continuing to work together to try and find common ground, so the Banking Committee will keep working after favorably reporting out the bill next week."
Senator Bob Corker, a Tennessee Republican who helped draft an early version of the plan, said in a May 7 interview that adequate support for the bill was uncertain.
"We know we have the votes to pass it out of committee," Corker said. "The question is, can we broaden support? I don’t think we can say yet how that’s going to work out."
The bill would create a Federal Mortgage Insurance Corporation to provide insurance for mortgage-backed securities. It also would allow banks to be an aggregator, guarantor, securitizer and lender of mortgages.
The bill relies on incentives to persuade financiers to lend to groups with higher risk profiles. Consumer and civil-rights advocates are pushing instead for a mandate that those groups be served.
In recent weeks, the bill's supporters had courted Warren for her support, said two of the people. Warren has previously said that any housing measure needed to include explicit affordable housing goals, not just incentives.
"The affordable housing standards issue and the duty to serve I think are important," Brown said at a Bloomberg breakfast last month. "I don’t think they're addressed in the way they should be. I think there is increasing sentiment I hear from people from all over the financial services sector, from Wall Street to community banks to credit unions, that say, 'How is this going to work?'"
Johnson postponed a committee vote on April 29 to provide more time to build Democratic support. He has said he was aiming to reconvene the panel next week.
The Johnson-Crapo bill would phase out Fannie Mae and Freddie Mac over a five-year period and replace them 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. government in getting any compensation from the wind-down.
The bill is based on a framework introduced last year by Corker and Mark Warner, a Democrat from Virginia.
"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," Merkley said in an interview on April 29.