The Senate Banking Committee has forged a strong bipartisan agreement to reform the housing finance market, but most observers predict that lawmakers will be unable to get the legislation finalized and passed through both chambers of Congress this year.

That leaves the question of how—and whether—the effort gets picked up in 2015 as a key issue, particularly as the November elections could shift the balance of power in the Senate.

Although the midterm elections are still months away, Republicans are in position to potentially take control of the Senate while solidifying their majority in the House. If the GOP controls both chambers, it could dramatically change the dynamics around reform of Fannie Mae and Freddie Mac, including harming the current bipartisan effort's chances of survival.

With the midterms looming closer, we offer some preliminary thoughts on the impact of the elections on the Banking Committee and efforts to overhaul the housing finance sector.

Senate Banking Panel Will Get a New Leader

Whatever happens in November, the bipartisan teamwork displayed by Senate Banking Committee Chairman Tim Johnson and Sen. Mike Crapo, the panel's top Republican, over the past year on housing finance reform and other issues is a limited time offer.

"Regardless of what happens, the leadership of the committee is going to take a sharp move to the left or a sharp move to the right," said Edward Mills, a policy analyst at FBR Capital Markets.

First and foremost, Johnson has announced he will retire at the end of the year, opening up what could be an interesting shuffle for chairman in 2015 if Democrats hold on to their majority. No clear successor has emerged among senior Democrats on the panel, with Sens. Jack Reed of Rhode Island, Charles Schumer of New York, Robert Menendez of New Jersey, and Sherrod Brown of Ohio, all named as possible successors at this point.

But Democrats are in danger of losing their majority. Of the 36 Senate seats in play this year, 16 are looking "potentially competitive," wrote Larry Sabato, director of the University of Virginia's Center for Politics, in his March 13 Crystal Ball report. Fourteen of those competitive races are currently held by Democrats and just two are held by Republicans. He's currently predicting 49 Republican seats to 48 Democratic seats, with three races (all with Democratic incumbents) still classified as toss-ups.

If the GOP wins control of the chamber, that could also set into motion a crucial game of music chairs. Sen. Richard Shelby, R-Ala., who served as chairman of the Banking Committee from 2003 to 2006, would be permitted to resume the gavel for two more years under Republican rules. (He subsequently served as ranking member for the next six years, hitting his term limit for that position at the end of 2012, when Crapo took over.)

Shelby has not publicly stated whether he would take the chairman spot again, and his decision likely hinges on the success of his colleague Sen. Thad Cochran, R-Miss., who is up for reelection this year. Cochran, who faces a difficult primary this summer, has similarly termed out as ranking member on the Senate Appropriations Committee, where Shelby now serves as the top Republican, but has several years left as chairman should the chamber switch back to GOP rule. Shelby would be much more likely to resume his position on the Banking Committee if he can't take the top seat on the appropriations panel, observers said.

 It's also worth noting that none of the potential next heads of the banking panel have weighed in on either the Johnson-Crapo agreement or an earlier, similar bill from Sens. Bob Corker, R-Tenn. and Mark Warner, D-Va. It's unclear at this point if that's a matter of keeping their powder dry or suggests philosophical opposition to the framework for unwinding the government-sponsored enterprises.

Shelby Likely to Take a More Conservative Approach

While a lot is in flux around who will lead the banking panel next year, one thing is certain: if Shelby retakes the gavel, he is likely to push for a more conservative housing finance solution than Johnson and Crapo. How conservative he goes and whether it's enough to alienate Democratic supporters on the committee is the crucial unanswered question.

"He's not going to let the desire to compromise run this, he's going to let the desire to fix the problem drive it," said Mark Calabria, director of financial regulation studies at the Cato Institute and a former Shelby staffer.

Still, observers have pointed out that a key turning point for the legislation this year will be the committee vote, which staff is reportedly aiming to get done before the spring recess next month.

Even if the bill does not get to the full Senate this year, a near unanimous vote out of the committee conceivably sends a strong message that a bipartisan consensus has been reached.

"The fact that you will have had a bipartisan bill come out of the committee this year, there's no doubt in my mind that product has a lasting impact," said one financial services lobbyist. "The reality is that Shelby is going to need the Democrats."

Several watching the debate have said they don't expect Shelby to support the Johnson-Crapo bill, and either way the lawmaker is unlikely to weigh in on the measure until at least the committee markup. But it's possible that Shelby could ultimately accept a similar basic framework, albeit with a tack to the right, said Calabria.

"I think it's likely that he would ultimately have some sort of government guarantee, but it would be much more constrained and much less generous than what's there now," he said.

Shelby does, after all, have a long history of working on GSE reform, pushing for changes to Fannie and Freddie in the mid 2000's, ahead of the passage of a 2008 housing law. Ultimately, Shelby cut a deal with then Chairman Chris Dodd at that time to get a bill passed.

Some observers said Shelby is likely to want to act sooner rather than later because the two GSEs remain in conservatorship and have been effectively nationalized, an untenable position to many across the political spectrum.

"If your objective is to pass legislation, then I think there is some middle ground that you almost have to operate in," said Brian Harris, a senior vice president at Moody's Investors Service. "The alternative is where we are right now—you're in this twilight zone with these entities in conservatorship, but there's uncertainty about their future."

Nevertheless, Shelby would only have two years left as chairman, and the focus by the end of 2015 would already be turning to the presidential elections in 2016—a narrow window to get anything done. As such, some have asked whether the long-time lawmaker would be willing to play ball with Democrats and other supporters of the Johnson-Crapo bill at all, particularly if he decides the current framework doesn't go far enough in overhauling the mortgage finance system.

"He has never exhibited himself as someone who feels pressure," said Mills. "He represents a different era of being a member of Congress—it's not the short-term, headline-grabbing, pass-it-now mentality. He's very much in the model of the Senate as the saucer that cools the tea."

Shelby, a conservative Republican, also has a history of backing away from deals that he doesn't like. He was a vocal opponent of legislation for the Troubled Asset Relief Program and he failed to reach a deal with Dodd on what became the Dodd-Frank Act.

"Shelby would look at this and say he's willing to do something that is better than status quo, but not solely for sake of doing something," said Calabria. "He would approach this from a negotiating position, and only sign onto something if he thinks there's actually improvement."

Committee Dynamics Will Also Shift

Moreover, any new banking panel chairman will also have to deal with at least a somewhat different cast of committee members—the prognosticating isn't as simple as swapping in Shelby for Johnson, observers noted.

Sen. Mike Johanns, R-Neb., a co-sponsor on the original Corker-Warner bill is set to retire, as is Sen. Tom Coburn, R-Okla., who has not signed on to the legislation. Sen. David Vitter, R-La., who has not publicly indicated support for the bill, is running for governor of his home state in 2015, and if he wins could be gone before legislation moves.

On the Democratic side, Sen. Kay Hagan, D-N.C., a supporter of Corker-Warner, is currently facing a tough reelection battle. Warner is also up for reelection, and while he is currently favored to win, it's an election observers continue to monitor.

It's also possible one or two members could move on to different committees, and if Republicans win, they would likely pick up a couple of new seats to fill on the panel.

"If there is a Republican wave, you'll see what you've seen in the House, where the moderates are the ones who suffer the most defeats, so they are disproportionately underrepresented," said Mills. "You'll probably see more polarization."

Indeed, the politics of any newcomers on the committee could likely help steer the direction of any GSE legislation, at least on the margins.

For example, one race to watch will be the Senate contest in West Virginia, where Republican Rep. Shelley Moore Capito is running to take the seat of retiring Sen. Jay Rockefeller. Capito is a senior member of the House Financial Services Committee and a lead sponsor of a much more conservative plan to unwind the GSEs championed by Chairman Rep. Jeb Hensarling, R-Texas. If she wins, her experience could win her a seat on the Banking Committee, a move that could further complicate the debate.

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