WASHINGTON — In a political atmosphere of intense partisan divisions, Republicans and Democrats on the Senate Banking Committee sounded on the same page about how to reform Fannie Mae and Freddie Mac during a panel hearing on Thursday.

But it was clear that despite a bipartisan willingness to enact reform, they were still a long way off from a deal.

"We are starting to first of all [see] a lot of agreement on the issue set that we need to deal with,” Chairman Mike Crapo, R-Idaho, told reporters after the hearing. He added, “There clearly is not one consensus that is out there yet, but there is convergence.”

Sen. Bob Corker, R-Tenn., and Sen. Elizabeth Warren, D-Mass.
Sen. Bob Corker, R-Tenn., said there appears to be consensus around the need for an explicit government guarantee, while Sen. Elizabeth Warren, D-Mass., said any reform package has to help affordable housing. Bloomberg News

Following are four areas that might trip up lawmakers as they attempt to craft a Senate bill.

An explicit government guarantee

Popular mortgage products like the 30-year fixed loan will not likely be possible feasible if policymakers craft a new housing finance system without a government guarantee, according to experts.

But the idea of a guarantee remains anathema to many conservatives, particularly House Financial Services Committee Chairman Jeb Hensarling.

For now, however, Senate Banking Republicans appear willing to go along with some government backstop.

“It seems to me the consolidation is coming around the fact that we do need to have an explicit guarantee,” Sen. Bob Corker, R-Tenn., said during the hearing.

But he said convincing other Republicans of that may be difficult.

“We need to acknowledge if that is going to be there, there will be people on my side of the aisle that will be a tough one to get to," he said.

Affordable housing

A past legislative effort by Corker and Crapo was sunk by Democrats because of concerns that the 2014 bill would have eliminated affordable housing goals for Fannie Mae and Freddie Mac. Instead, that bill included an additional charge on mortgage-backed securities that would be dedicated to affordable housing.

Many Democrats have said it didn't go far enough. While the bill passed the banking committee, it never made it to the Senate floor. Sen. Mark Warner, D-Va., who is negotiating with Corker on housing finance reform, said the additional charge will be part of the updated plan, but he acknowledged that still may not be enough for Democrats like Sen. Elizabeth Warren of Massachusetts, who objected to the plan the last time around.

“There is an affordable housing crisis in this country,” Warren said during Thursday's hearing. “Many people cannot afford to buy homes, and it has pushed the homeownership rate below 64%, which is well below the rate it was before the pre-bubble years of the early 2000s.”

“Any effort to reform our housing finance system must address this crisis," Warren said. "If it doesn’t address this crisis, then it doesn’t solve the problem in front of us and in my view is not worth doing at that point.”

But Republicans often blame political interests for bloating the housing market and giving both borrowers incentive to take on more debt than they can afford and lenders incentive to offer products with low down payments and teaser rates. Many of them may view Warren's desire to increase the homeownership rate beyond 64% as dangerous.

“What appeared to me from the outside looking in was that we had a number of things happen at one time,” said Sen. Mike Rounds, D-S.D., who pointed to “political pressure" and a “relaxation of underwriting and … an honest attempt to allow more people into homeownership” as causes of the financial crisis.

Small-lender access

One of the evolving fights is between small and large lenders. Small lenders fear that the past reform proposal would give the largest lenders a competitive advantage and cut them out of the market.

The hearing featured former Federal Housing Finance Agency Acting Director Ed DeMarco, who is now with the Financial Services Roundtable, which represents the largest banks, and David Stevens, the head of the Mortgage Bankers Association, which also counts large lenders among its membership.

“I hope in a subsequent hearing we'll be able to hear more from smaller lenders as well,” Sen. Sherrod Brown, D-Ohio, said in his opening statement. “For all of its faults, the current system does provide access to small lenders.”

Some of the small lenders view Corker’s plan as a giveaway to big lenders, but Corker disagreed with those claims.

“Access to secondary markets by entities of all sides needs to be there, and I think there has been a misunderstanding that people think somehow there is something being designed that tilts towards the larger institutions," he said, but "nothing could be further from the truth.”

A lack of capital

The primary driver of current discussions is that Fannie and Freddie by design will run out of capital by the end of the year.

They can still draw on a $258 billion line of credit from the Treasury, but some fear that a draw could disrupt the market, particularly if it were to occur simultaneously with some other unforeseen economic event.

“Without reform, taxpayers” would be on the hook if there were another 2008-type crisis, said Sen. Thom Tillis, R-N.C.

Federal Housing Finance Agency Director Mel Watt, who is overseeing the conservatorship of Fannie and Freddie, asked the panel in May to move legislation to allow the two government-sponsored enterprises to rebuild capital, but lawmakers appear reluctant to do so.

Stevens said such a move could hurt reform efforts.

“The good news," he said, "is there is an ample line of credit to cover all losses, and focusing on anything other than legislative reform is a diversion, and we should not go down that path.”

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