Tucked among the many provisions crammed into Senate Banking Committee Chairman Richard Shelby’s massive legislation to overhaul financial regulations is a section that would go a long way toward resolving the status of bailed-out mortgage giants Fannie Mae and Freddie Mac.
Shelby’s reform package, which is set for committee mark-up next week, would be the largest overhaul of the financial reform system since the 2010 Dodd-Frank reform law, touching almost every aspect of the U.S. financial system and deregulating many aspects of community banking.
Democrats on the committee and the White House have signaled initial opposition to the Shelby’s ambitious proposal, leaving him and his colleagues to figure out which measures can remain in the package to make it viable.
While some aspects of the housing finance reform measures may be controversial, there is bipartisan support for shuttering Fannie and Freddie and fulfilling what one insider called “the last completely unfinished business” left from the financial crisis.
Fannie and Freddie were bailed out in late 2008 and received nearly $188 billion in taxpayer funds. More recently, they returned to positive cash flow, but they remain in the government’s custody, as lawmakers have failed to agree on legislation to unwind them and revamp the housing finance system to prevent further bailouts.
Shelby’s draft bill “blocks the increasingly likely path absent congressional action” in which “Fannie and Freddie are just let back out in the wild out on their own, taking us all back to 2005,” said Jim Parrott, a senior fellow at the Urban Institute and former housing expert for President Obama’s National Economic Council.
Key lawmakers in both parties oppose allowing Fannie and Freddie to return to the private-profit, public-risk model they operated on before the crisis.
The legislation would prevent that situation from arising by clarifying that the Treasury cannot sell its stake in the two government-sponsored enterprises unless authorized by Congress, eliminating the possibility of an administrative decision to privatize Fannie and Freddie.
Some investors in the companies, which are delisted from stock exchanges, have been aiming for the re-privatization of the firms, seeking to allow them to rebuild capital through a legislative or judicial reversal of a 2012 decision by the Treasury to take all of the government-sponsored enterprises’ profits.
The housing-finance provisions of Shelby’s bill “inappropriately politicize the conservatorship of Fannie and Freddie, and don’t belong in this financial reform legislation,” said Tim Pagliara, the executive director of the group Investors Unite that advocates on behalf of private shareholders of Fannie and Freddie.
Not only would Shelby’s legislation effectively rule out the possibility of Fannie and Freddie being returned to private hands, but it also includes several steps that would make it easier for Congress to pass legislation replacing them with a new system of housing finance.
Those include mandated increases in risk-sharing deals by Fannie and Freddie, which involve private investors taking on more risk relative to taxpayers and standing to suffer the first losses on mortgage-backed securities guaranteed by the government.
More importantly, said Parrott, the legislation directs the government caretaker of Fannie and Freddie, the Federal Housing Finance Agency, to build a new company that would replace parts of the companies’ systems for securitizing mortgages and do some of the administrative work of securitization, with the purpose of making the company a nonprofit that other private-sector organizations, not just Fannie and Freddie, could use.
“You’re sort of setting the groundwork for competition over time” with that provision, Parrott said, making it easier for Congress to pass legislation creating a system in which private capital could play a greater role in the secondary market for home loans. Through Fannie and Freddie and other government agencies, the government backs roughly three-quarters of all new home loans, according to the Urban Institute.
Increasing risk-sharing and developing the common securitization platform would help transition the government from being in a position of “bleeding edge risk” on any mortgage securities to being a “catastrophic reinsurer,” said David Stevens, the president and CEO of the Mortgage Bankers Association.
Stevens noted that similar measures have enjoyed support from Mel Watt, the current regulator of the Federal Housing Finance Agency, as well as from the Obama Treasury.
Nevertheless, they are at risk in the bill, which includes a number of regulatory roll-backs that are sure to draw opposition from Wall Street critics such as Sen. Elizabeth Warren, D-Mass.
Sen. Bob Corker, R-Tenn., one of the authors of bipartisan legislation to wind down Fannie and Freddie that passed the banking panel last year but failed to gain traction in the broader Senate, declined to say whether the housing finance provisions would help bring Democratic support for the package.
“Obviously I’d like to see things go much further and us actually pass a bill to deal with [Fannie and Freddie] fully, but certainly I like those components,” Corker said Thursday in the Capitol. He said he would begin talking with Democratic colleagues about the measure Thursday afternoon.
Stevens, who has been speaking with lawmakers on the legislation, expressed hope that the housing finance provisions would gain support once lawmakers fully understood them. “I think it’s fairly well understood that not all of this can go through,” Stevens said of Shelby’s overall package, “but the question is there enough to agree on.”
