WASHINGTON — As if the drive to reform the financial regulatory system did not have enough moving parts, Senate Republicans pressed Thursday to include the future of Fannie Mae and Freddie Mac in the debate.
During the Senate Banking Committee's first hearing this year on the role of the GSEs, several GOP members criticized the Obama reform plan for punting on the issue, and said Congress should not do likewise.
"Regulatory reform, I believe, must involve the GSEs," said Sen. Richard Shelby, the panel's top GOP member. "But the administration made no effort to include the GSEs in its financial regulatory reform proposal. Instead, the administration has said they will not make a proposal on the GSEs until next year. Why?"
Other members of his party echoed the Alabama Republican.
"Don't you think it's odd that Fannie and Freddie reform are nowhere on the radar?" Sen. David Vitter, R-La., asked Ed DeMarco, the acting director of the Federal Housing Finance Agency. "I'm not saying they're the only problem, but isn't it logical for that to be a big part of the plan?"
DeMarco, whose agency is independent of the administration, dodged the question, simply responding that Congress and the White House need to discuss the GSEs.
The September 2008 conservatorship imposed on Fannie and Freddie opened one of the industry's most devastating months in a generation. Within weeks, Lehman Brothers had collapsed, American International Group Inc. had been rescued and Congress quickly enacted the Troubled Asset Relief Program.
But when the Obama administration unveiled its far-reaching regulatory reform plan in June, it was largely silent on Fannie and Freddie. It said it would detail its vision of the GSEs in February when it releases its next budget. Meanwhile, the White House has made Fannie and Freddie central to its efforts to modify troubled mortgages.
Democrats on the panel, many of whom have their own issues with the administration's plan, mostly avoided discussing Fannie and Freddie's absence from the proposed regulatory revamping.
"Whether or not we deal with this in the regulatory reform proposal or after the fact, we're going to have to deal with this sooner or later," Banking Committee Chairman Chris Dodd said.
Because of the relatively close divide between political parties in the Senate, if Republicans choose to press the issue, it could further delay regulatory reform, which is already likely to be debated well into next year. Little consensus emerged Thursday about what the government should do with Fannie and Freddie or the mortgage markets in general. Several Republicans expressed a preference for privatizing the GSEs.
"Our office would very much like to be involved in a step-by-step process with you on how we unwind this and hand this function over to the private sector," said Sen. Bob Corker, R-Tenn. "Housing loans really aren't that complicated, and by creating these huge entities, we really have taken away from community banks an opportunity to make money on something."
Sen. Jim Bunning, R-Ky., was more blunt.
"How do we get the GSEs out of business?" he asked Peter Wallison, a fellow at the American Enterprise Institute who also testified.
Wallison, who is a member of the Financial Crisis Inquiry Commission, said this could be accomplished by creating a "good bank-bad bank" structure, but he noted that taxpayers would probably not get all their money back if policymakers went that route.
"The taxpayers are going to have to eat those losses," he said. "It's clear that the U.S. government has always had to stand behind the GSEs, and the taxpayers are going to have to pay the cost of this. It's very regrettable."
Beyond privatization, lawmakers are expected to consider nationalizing Fannie and Freddie or reworking them into structures akin to public utilities.
Sen. Tim Johnson, D-S.D., pressed William Shear, the Government Accountability Office's director of financial markets, on whether these potential paths might affect the cost of mortgages.
"Historically, when the GSEs were established, we had very large regional disparities in mortgage rates," the GAO official said. "The GSE structure addressed that, and now we're in a financial system where you have large, diverse, nationwide financial services firms. … A return to regional disparities, we think, would be unlikely to occur."