It was always going to be an uphill struggle to pass housing finance reform this year. But it now appears to be downright impossible.

When draft Senate legislation — based on talks between Sens. Bob Corker, R-Tenn., and Mark Warner, D-Va. — leaked back in January, observers had warned the effort would need to quickly pick up steam in order to have a prayer of enactment ahead of the midterm elections this November.

Instead, momentum has been moving in the wrong direction.

Signage in front of the Fannie Mae and Freddie Mac headquarters.
The future of Fannie Mae and Freddie Mac remains up in the air in the absence of formal legislation. Bloomberg News

The sharp debate over the Senate’s banking relief bill this past month has renewed doubts that a bipartisan consensus on housing can be reached anytime soon, according to sources tracking the negotiations. Crucially, the relief legislation pitted moderate Democrats, who are backing the bill with Republicans, against their more progressive colleagues. The fight proved tougher — and more personal — than many predicted. That makes the chances of winning moderates over on yet another controversial deal, this time over resolution of the government-sponsored enterprises, remote at best.

“The regulatory relief effort has taken more time and left more bruised egos than anyone expected at the outset of this Congress, which has left Democrats uneager to delve into the far more complicated and contentious debate over GSE reform,” said Isaac Boltansky, director of policy research at Compass Point Research & Trading.

And the risk of yet another Senate vote on regulatory relief still looms. Rep. Jeb Hensarling, R-Texas, chairman of the Financial Services Committee, has said that he will not pass the Senate version of the legislation without further input from the House, either through formal or informal negotiations. That means the bill could end up back in the Senate before it is signed into law.

This latest political dust-up is hardly the only factor working against comprehensive reform of the mortgage market — but it’s another blow to a movement struggling to gain traction nearly a decade after the GSEs were placed into conservatorship.

The timing around housing finance reform is worth considering because Corker, who has been a driver behind efforts to overhaul the GSEs for years, is set to retire at the end of 2018. And without legislative action in the near term, the odds go up that the Trump administration could act unilaterally to make changes to the mortgage market through the Federal Housing Finance Agency.

What differentiates the regulatory relief effort and GSE reform? The Senate package loosening some Dodd-Frank Act requirements has the broad backing of community and regional banks, which have been extremely vocal in calling for changes to the crisis-era law since its passage. But while many would argue — rightly — that the current status of the GSEs is problematic at best, the mortgage market is not in active crisis, meaning there is no broad constituency calling for change right now, even within the housing industry.

“There is real hesitation to go this path again” on GSE reform, said one financial services lobbyist. “The status quo is working and so it’s not the kind of thing members are hearing a whole lot about, except from a handful of those interested in mortgage finance.”

Overhauling the mortgage finance system is also arguably a much more complex and risky endeavor than regulatory relief. Despite some solid efforts, including a bill approved by the Senate Banking Committee in 2014, there’s not yet wide-ranging consensus over what a future system might look like, what role the federal government should play in backstopping the market or how affordable housing goals fit into the picture. There’s no single fix to rally around.

“It’s the Obamacare of mortgages,” said Laurence Platt, a partner at the law firm Mayer Brown. “There are so many pieces that fit together, and if you eliminate one, it has a cascading effect on everything else. That makes it particularly difficult for compromise.”

Because of these stark divisions, Democrats who might consider signing on to a bipartisan GSE plan would likely face strong resistance, including from housing and civil rights advocates who worry that the draft proposal leaked earlier this year could weaken access to affordable housing.

Moderates resisted hard challenges from consumer groups and progressive lawmakers in the vote on regulatory relief, but they are unlikely to do so again ahead of the midterms.

Complicating matters for Congress is a lack of clear direction from the Trump administration. Treasury Secretary Steven Mnuchin has offered general support for improving the mortgage finance system, but the White House has yet to offer any concrete details about what kind of approach it might want to pursue.

Still, some lawmakers on the committee suggested they are open to continuing discussions — although their comments do not necessarily convey a sense of urgency. Even if legislation is not taken up by the Banking Committee, it could help serve as a marker to guide future administrative efforts by the FHFA. Though at this point, it’s an open question whether a formal bill will even be introduced.

“I’ve long believed that GSE reform requires broad bipartisan support to be successful,” Warner said in a statement. “The banking bill shows that it’s possible for both parties to work together in good faith and achieve meaningful reform for the American people.”

Corker, along with Democratic Sens. Jon Tester of Montana and Joe Donnelly of Indiana, two moderates who worked closely with lawmakers across the aisle on the banking relief bill, did not respond to a request for comment.

Sen. Heidi Heitkamp, D-N.D., who has frequently been involved in talks around GSE reform, said in a statement that negotiations will continue — notably, however, she emphasized that regulatory relief remains the top priority.

“It’s important for Congress to pass housing finance reform, and these are discussions we will continue to have,” she said. “But the Senate passed an overwhelmingly bipartisan bill to give regulatory relief to credit unions and community banks so they can better serve borrowers in rural communities. And my primary focus is on getting that bill through Congress and into law.”

While it may read early spring on the calendar, the year is almost over by Washington’s standards. With no bill on the table in either chamber — let alone full committee consideration of a plan — or any formal input from the White House, there simply isn’t enough groundwork laid for GSE reform to be enacted into law this year before focus is completely lost to the midterms this summer. Lawmakers will be stretched enough getting the banking relief bill done.

And with Democrats hoping to retake the House after the November elections, they may have even less reason to want to negotiate the issue. If they do win, talks would likely start fresh.

Yet policymakers have kicked the can for so long, it's difficult to envision real action on housing finance no matter which party wins the upcoming elections. Let's hope it doesn't take another crisis for Congress to step up.

Victoria Finkle

Victoria Finkle

Victoria Finkle is editor of American Banker's op-ed blog, BankThink.

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