At last month’s annual mortgage-industry trade show, most political and industry analysts agreed that there aren’t great odds that Congress will pass a bill addressing the future of Fannie Mae and Freddie Mac before 2014, let alone 2016.
Congress cannot end Fannie or Freddie because they provide lending and/or guarantees for a majority of loans these days. Abolishing Fannie and Freddie would destroy the housing market — and Congress knows it.
Several developments could make the next five or six months among the more consequential periods for housing-finance policy since the companies were taken over by the government five years ago. Following are three factors that could shape the fate of housing overhaul.
First, as reported by The Wall Street Journal, Fannie and Freddie are now disclosing large profits. This could make it easier for the companies’ defenders — who were silent when the firms were hemorrhaging cash during the bust — to more forcefully lobby in favor of less dramatic changes. By February 2014, when both companies report their fourth quarter earnings, both firms should be able to say that they’ve sent more in dividends to the U.S. Treasury than the amounts they were forced to borrow over the previous five years — see additional article in The Wall Street Journal.
Rising profits could also trigger an important, but obscure change in federal budgeting, where congressional accountants “score” the firms as revenue-generating entities. If this happens, Congress would either have to raise revenue or cut spending elsewhere as part of any overhaul.
Second, the Obama administration is moving ahead with plans to install a permanent director to the independent agency that oversees Fannie and Freddie — the Federal Housing Finance Agency. This director will have an incredibly powerful role, standing in the shoes of the shareholders and board of directors of both companies, while plotting long-term strategy and making day-to-day management decisions.
Third, the Senate Banking Committee is working in a bipartisan fashion towards constructing a comprehensive housing-finance overhaul bill that will address the future of Fannie and Freddie.
Bipartisan agreement is far from assured. It involves threading a needle between three general groups: the centrist supporters of the Corker-Warner bill, liberal Democrats who want to see a larger government role (particularly in affordable housing), and conservative Republicans who are wary of continued, heavy federal involvement in the mortgage market.
Whatever the committee produces will essentially mark the starting point for what, if anything, Congress is able to pass in 2015 or 2017. In other words, even if this is only the first inning, a number of key decisions could get made here that define the boundaries for the rest of the game.
House Republicans have advanced their own bill with no Democratic support, which should serve as one end point for any overhaul. How far the more-conservative House Republicans are willing to bend to support a greater federal role in housing could determine how soon a bill arrives on the president’s desk.
Lawmakers further out on the left, meanwhile, are likely to insist that this new system provides sufficient credit access to low- and moderate-income households. They’re wary of any market in which government guarantees mostly serve the borrowers that arguably need them the least. Among the key questions to unfold: what does the White House do if liberals decide that the centrist Senate bill doesn’t go far enough?
The upshot is that the next few months could show whether there’s any reasonable chance of getting legislation passed while President Obama is in office, or whether these decisions will get kicked down the road beyond 2017.
It will be interesting to watch, but our guess is much of this is classic congressional rhetoric that will not effectuate any material changes for the indefinite future. Fannie and Freddie were a major reason why the market has recovered as they stepped in to fill the lending void when bank lending dried up. We simply don’t see how that can be taken away and not lead to a significant fall for real estate.
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