A bill to overhaul mortgage finance giants Fannie Mae and Freddie Mac won approval Thursday from a divided Senate Banking Committee and moved on to an uncertain future.
On a 13-9 vote, the committee advanced a bipartisan compromise bill that experts welcomed as a real attempt to revamp mortgage finance and get Fannie and Freddie out of conservatorship. They’d be phased out and replaced by a government reinsurance program to backstop mortgage lending.
The legislation’s future is uncertain because it passed without enough votes to force a vote on the full floor of the Senate. Seven Republicans voted for the bill, which was crafted by the top committee leaders from each party, but six Democrats voted against it, concerned that the compromise would work against low-income homebuyers.
And the chairman of the House Financial Services Committee, which passed a more radical bill almost a year ago, issued a statement effectively suggesting the Senate’s measure is dead on arrival there.
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“The window for action this year is quickly closing, and I fear it may already be too late during this Congress with an already full agenda to get meaningful reform bills through both chambers,” said Rep. Jeb Hensarling, R-Texas, accusing Senate Democrats of “controversial and irresponsible politicization” of mortgage finance.
Why so much attention on a bill with a doubtful future? The mortgage market is estimated to be above $10 trillion, so the status quo is not a viable option for too much longer.
Uncertainty about how mortgage lending will operate in the future is thought to weigh on banks and borrowers. And this is what the legislation seeks to reverse.
“It laid the institutional foundation for future reform,” Mark Zandi, the influential chief economist for Moody’s Analytics, said of the bill.
Zandi, who helped draft the compromise, said the lack of clarity for Fannie and Freddie after almost six years in government hands was “corrosive.”
Mortgage Bankers Association President David Stevens praised Thursday’s compromise bill as one that “reforms our housing finance system in a way that ensures sufficient liquidity for single-family and multifamily mortgages while also protecting taxpayers.”
Fannie and Freddie purchase mortgages from lenders and bundle them together for sale as bonds called mortgage-backed securities.
From 2000 to 2007, Wall Street banks aggressively took market share from Fannie and Freddie by bundling their own mortgage bonds, with weaker requirements on lenders. Standards became unhinged, and Fannie and Freddie responded to the challenge by lowering their own loan standards in order to compete.
The entire mortgage finance system fell apart in the summer of 2008, prompting the Bush administration to protectively seize Fannie and Freddie, which had operated as private companies chartered by Congress. They’ve been under government control ever since.
“The administration welcomes today’s strong bipartisan vote,” President Barack Obama said in a statement Thursday, calling it an “important step toward achieving a more sustainable housing-finance system.”
The question of what to do about Fannie and Freddie gained steam last year as the housing sector seemed to recover. Prices increased, sales of foreclosed homes waned and optimism grew.
But housing began slumping again earlier this year, prompting the head of the government regulator of Fannie and Freddie – the Federal Housing Finance Agency – to announce this week new steps to stimulate the market.
Mel Watt, a former North Carolina congressman, reversed plans by his predecessor at the agency to limit the value of loans Fannie and Freddie can buy. He also promised to relax rules so that banks don’t have to buy back as many of the bad loans that they’d pushed off on Fannie and Freddie before the housing crash.
Watt’s action signaled to financial markets and Congress that absent legislation, the two pillars of mortgage finance will do more than they have of late to help spur greater lending and homeownership.
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