WASHINGTON — Two steps forward and one step back.
That appears to be the current state of play regarding the effort to revamp the housing finance system.
On the one hand, House Financial Services Committee Chairman Jeb Hensarling made significant concessions this week in an effort to strike a bipartisan and bicameral deal, agreeing to include a government guarantee of the mortgage market and affordable housing measures.
Yet just as he moved closer to Senate lawmakers working on their own, they moved further away from him. The current plan is to keep Fannie Mae and Freddie Mac alive in a new system, a break from the Senate’s last effort. That sets up a new potential disagreement with Hensarling, who made it clear the two government-sponsored enterprises should be wound down.
“There appear to be policy differences between the two chambers,” said Isaac Boltansky, an analyst at Compass Point.
Under Hensarling’s most recent proposal, Fannie and Freddie would be liquidated and their charters repealed, while they are replaced with a revamped Ginnie Mae that issues mortgage-backed securities. The Senate, meanwhile, would keep Fannie and Freddie as two of several private-sector guarantors.
The question of what happens to Fannie and Freddie has always been a central one in discussions of housing finance reform. But until recently, there appeared to be a broad, bipartisan agreement that they should be eliminated.
It was one area where Hensarling agreed with the Obama administration and Senate Banking Committee Chairman Mike Crapo.
Yet now that consensus appears to have unraveled and may prove to be a significant challenge. The question is why.
To some, it’s due to fears expressed by community bank lenders, who argue that if Fannie and Freddie are eliminated, big banks will dominate any new system, leaving them out in the cold.
“Small lenders are very apprehensive about disruptions to the marketplace, so the idea of winding down or dismantling Fannie and Freddie amounts to what we think is a huge disruption potentially, so we would have a lot of difficulty getting on board with that,” said Glen Corso, executive director at the Community Mortgage Lenders of America.
There has also been ongoing pressure from hedge funds which bought stock in Fannie and Freddie after they were seized by the government. They would stand to gain significantly if the GSEs were spun out from conservatorship and returned to private control. Hedge funds appear to have successfully lobbied some senators on the issue, making striking a deal difficult if Fannie and Freddie are eliminated.
“We see the shifted … stance toward a continued GSE role and some concessions to shareholders as potentially reducing or removing barriers to reform,” wrote Charles Gabriel, an analyst at Capital Alpha Partners.
While such a move may make a deal in the Senate easier, it creates a new point of conflict with Hensarling, just as others were being removed. The shift in the Senate plan that leaked out after Hensarling’s speech appeared to move the goal post on the House Financial Services chairman who had just acquiesced to a government guarantee in the secondary mortgage market.
Jaret Seiberg, an analyst with Cowen & Co.’s Washington Research Group, said Hensarling’s plan has momentum, but may have more so if he’s willing to give ground on the existence of Fannie and Freddie.
“From a simplicity standpoint, Hensarling's idea seems more appealing for Republicans,” Seiberg wrote Friday. “That is especially true if Fannie and Freddie are repurposed as guarantors rather than liquidated.”
Whether Hensarling will compromise on this issue is uncertain. The Texas Republican has long blamed Fannie and Freddie for causing the financial crisis. Though he has acknowledged that a government guarantee of the mortgage market and affordable housing provisions are necessary to win a bill, he did not sound open to keeping the GSEs intact.
"To be clear, Fannie and Freddie must be wound down and their charters repealed,” he said in his speech. “I fear any plan to recap and release may very well constitute deja vu all over again.”
In an interview, Rep. French Hill, R-Ark., said Hensarling had made it clear that “the House is open to new approaches” and that the Ginnie proposal “merits review.”
But he noted that one key player in the debate — the Trump administration — has not yet weighed in. So far, Hill said the Treasury Department has given no signs on whether it wants to preserve and repurpose Fannie and Freddie or eliminate them. A principles document is expected early next year.
“From the meetings I have had, they have not indicated a preferred approach,” Hill said. “We are anxious to hear from the Treasury.”