Fannie Mae, Freddie Mac: Senate delays bill despite enough support

Posted by Rapti Gupta on Apr 30, 2014 08:23 AM EDT
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The recent bill discussed at the senate to wind down Fannie Mae and Freddie Mac, the two government-backed lending giants, was opposed by six democrats, who said they won’t change their stand if major alterations aren’t made to the bill. (Photo : Reuters)

The much-anticipated senate vote on the bill to eliminate Fannie Mae and Freddie Mac, the two government backed mortgage giants, was postponed Tuesday as the leaders wanted to gather enough support for the bill.

Sen. Tim Johnson (D-S.D.), chairman of the Senate Banking Committee and Sen. Mike Crapo (R-Idaho), a top panelist, said at a hearing Tuesday that they wanted to win over some of the undecided lawmakers before passing the bill, according to The Wall Street Journal.

"We're going to have a little more conversation. We've narrowed it down to a very small group of points that potentially could bring a lot more members on," Sen. Bob Corker, one of the members who pitched the bill's early versions, told reporters on Tuesday.

While a majority of the panelists managed to reach a point of consensus, six of the Democrats were still undecided about the bill. Johnson and Crapo worked on the alterations until late Monday night but reportedly failed to get unanimous votes on the bill. Therefore, they decided to give the proposition some more time.

"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," Jeff Merkley, a Democrat from Oregon who was among the six undecided panelists, said in an interview to Bloomberg.

The in-doubt senators are rooting for changes like stronger lending insurance in poorer communities and increased liability limits of banks on mortgage securitization.

In March, Senators Johnson and Crapo revealed outlines of a bill they worked on to eliminate Fannie and Freddie. Here are some major highlights:

1. The first 10 percent of any mortgage losses will be borne by private interests before the government interferes.

2. Fannie Mae and Freddie Mac will be replaced with a single government entity, "Federal Mortgage Insurance Corp," which will be funded by user fees. The entity will insure bonds only after private lenders fail to do so.

3. The bill is also urging for stronger "loan underwriting standards," in which first-time buyers have to make a 5 percent down payment.

Several analysts are skeptical of the bill. Rafferty Capital's Dick Bove pointed out some reasons why the bill would not sustain in the senate. He asserts that if Fannie and Freddie are wound down, cyclical housing funding would be disrupted, mortgage rates would shoot up affecting affordability, mortgage-backed securities would lose its charm and the new entity would find it extremely difficult to raise capital.

"It will lower the price of every house in this country by crippling the mortgage finance industry. It will deny low income households the right to own homes. It will create instant slums. It will harm the economy for an extended period," Bove told Value Walk.

Other analysts believe that a delay in the bill could give Fannie and Freddie new life.

"Inertia is a powerful ally of Fannie Mae and Freddie Mac. The longer Congress avoids acting on mortgage-finance legislation, the greater the chances the two companies survive," analysts at Keefe, Bruyette & Woods Inc. wrote in a note to clients on Tuesday, according to The Journal.

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