Despite bold talk from Republicans, the political obstacles to reforming Fannie Mae and Freddie Mac remain nearly as steep as they have been throughout the eight years that the firms have been in the government's hands.
The biggest problem is that the finance industry wants to keep a government guarantee for mortgage securities, and liberals want any reform to fund affordable housing goals. Congressional conservatives oppose both.
Now that Republicans control both the White House and Congress, they have been pushing forward as if that disconnect didn't exist.
For Treasury Secretary Steven Mnuchin, a former banker, overhauling the bailed-out mortgage giants is a personal priority. And the banking committee chairmen — Wyoming Republican Mike Crapo in the Senate and Texas Republican Jeb Hensarling in the House — are also projecting optimism. This week, Crapo's committee will hold a hearing with the regulator in charge of Fannie and Freddie, the first step toward developing legislation.
Although Mnuchin, Crapo and Hensarling are meeting regularly to discuss housing finance reform, the obstacle is that it a bill conservative enough to pass the House would likely be too conservative, and too industry-unfriendly, to clear the Senate and make it to President Trump's desk.
That same dynamic saw a Hensarling-backed bill die after committee passage in 2013, and a bipartisan bill fails to gain traction in the Senate in 2014.
"Has anything changed in the dynamic such that if I were Hensarling, I could take a bill on the floor of the to get rid of Fannie and Freddie and have that given consideration in the Senate? No," said Chris Whalen, head of Whalen Global Advisors. The finance industry, Whalen explained, has no problem with the current set-up, in which Fannie and Freddie, as wards of the federal government with the guarantees that entails, buy mortgages from home lenders and package them into guaranteed securities for investors.
Hensarling and other House conservatives have long blamed the guarantees for mortgage-backed securities provided by Fannie and Freddie, for inflating the subprime bubble and generating the financial crisis, back when the government guarantee for their securities was still implicit, not explicit.
Conservatives remain hostile to allowing those guarantees to remain in place or be recreated in a new system of housing finance, a stance on full display this week.
In a committee meeting to pass unrelated legislation to overhaul the 2010 Dodd-Frank financial reform law, members of Hensarling's panel engaged in a lengthy debate with Democrats over the cause of the financial crisis, arguing that Fannie and Freddie were to blame.
"I can assure members of this committee that this issue will come back up again this year," Wisconsin Republican Sean Duffy, head of the housing subcommittee, said during the late-night Tuesday debate. "Because we know that the root cause of the crisis was mortgage-backed securities that were securitized through the [government-sponsored enterprises]."
In contrast, Crapo was part of the bipartisan group of senators that advanced a bill in 2014 that would have ended Fannie and Freddie but maintained the government backstop for mortgage-backed securities, through a new government entity that guaranteed securities packaged by private companies.
The measure failed to garner greater Democratic support in the Senate in part because it did not do enough to advance affordable housing goals or contribute to housing trust funds for some liberal members. Crapo is now working on finding a bipartisan path forward.
Yet the 2014 bill's framework, or something like it, is one that could work for housing markets, the mortgage security investor BlackRock said in a presentation published Friday.
The same presentation, however, labeled Hensarling's 2013 one of the "extremes" of reform possibilities that wouldn't work for markets.
"Those are, in my mind, irreconcilable," American Enterprise Institute housing expert Ed Pinto said of the difference between the industry view in favor of a government guarantee for mortgage securities and the conservative perspective.
Mortgage guarantees, Pinto argued, have historically served to drive up housing prices, creating the risk of bubbles. Yet they are favored by banks, investors, homebuilders, and retailers, he argued, because higher housing prices and more sales are better for their interests. "It all comes down to the rent seeking by the housing lobby," he said.
Conservatives also oppose the affordable housing programs favored by liberals — to them, lending goals risk instability, and housing trust funds are slush funds for left-wing groups.
Mnuchin, a former banker himself, might struggle to find a path for reform to work its way through Congress, given the gaps within and between the House and Senate.
"I've been around for 30 years and have followed the history of Fannie Mae and Freddie Mac very closely," Mnuchin said last week at an appearance at the Milken Institute, a think tank that focuses on financial issues. "We are determined that there will be housing reform."
Yet Mnuchin has not hinted at his own plans except to say that he aims to protect taxpayers and maintain the current level of access to home loans.
"There is liquidity, but that's because these entities are being run with government support," he said. "We want to make sure is that we can fix them and reformat them without creating a problem with housing liquidity."
But if Mnuchin has a plan for either getting House conservatives on board with a government guarantee or finding some sort of workaround, he hasn't said so yet.