Senate weighs future of Fannie, Freddie

A U.S. Senate plan for Fannie Mae and Freddie Mac, the most thorough yet for winding down the two mortgage financiers, faces a first test this week with its authors making last-minute changes to gather more support.

The 22 members of the Senate Banking Committee will decide as early as Tuesday whether the bill, the culmination of more than a year of delicate negotiations among Democrats and Republicans, gains momentum or fizzles.

The legislation would replace the companies over five years with federal insurance for mortgage bonds that would kick in only after private investors were wiped out. Current shareholders of Fannie Mae and Freddie Mac would be in line behind the U.S. in getting any compensation from the wind-down.

To keep the bill from stalling, committee leaders are trying to win over at least a few of the half-dozen Democrats on the panel who haven’t publicly embraced it. They have proposed changes including ones that would prevent big banks from monopolizing the mortgage business and add stronger protections for lending in disadvantaged communities.

Even as the White House and industry groups including the National Association of Realtors are lobbying for quick action on the bill, civil rights organizations and investors who would benefit from the continued existence of Fannie Mae and Freddie Mac are urging a delay. An impasse would leave the two companies operating indefinitely under federal control.

Restructuring the mortgage market is the largest piece of unfinished U.S. business from the 2008 credit crisis, when regulators seized Fannie Mae and Freddie Mac as they careened toward insolvency. The companies were bailed out with $187.5 billion from the Treasury while backing a growing share of mortgages as private capital dried up.

Only recently did they return to financial health, sparking calls from private shareholders including Bruce Berkowitz’s Fairholme Capital Management and hedge fund Perry Capital LLC to share in profits they are returning to taxpayers.

Six Democrats and six Republicans on the banking panel have previously endorsed the concept of the bill, written by Chairman Tim Johnson, a South Dakota Democrat, and its senior Republican, Mike Crapo of Idaho. That would be enough to move it out of the committee.

Still, Senate Majority Leader Harry Reid, a Nevada Democrat, is expected to allow a full Senate vote only if more party members come on board, said Isaac Boltansky, a policy analyst at Compass Point Research and Trading LLC in Washington.

Reid has expressed reservations about winding down Fannie Mae and Freddie Mac because the companies ensure that homebuyers are able to get affordable fixed-rate mortgages.

“Senate leadership appears far from enthused by the prospects of a floor vote on the measure,” Boltansky said in an interview. “Reforming the mortgage market just doesn’t fit into the pre-election priorities of either party.”

Fannie Mae and Freddie Mac, long political flash points in Washington, buy mortgages from lenders and package them into securities on which they guarantee payments of principal and interest; they now back about two-thirds of new home loans.

That dominance has led them to post record profits over the past two years as the housing market rebounded. Fannie Mae reported an $84 billion profit for 2013, the highest-ever for the 80-year-old firm, while Freddie Mac likewise reported a record profit of $48.7 billion.

The two companies last week sent memos to the Banking Committee estimating that mortgage costs would go up as much as 219 basis points for some borrowers under the system created by the bill. U.S. Housing and Urban Development Secretary Shaun Donovan criticized that analysis Monday, calling it a “narrative that was crafted by companies that don’t compete in the competitive market.”

Other estimates, including one by Mark Zandi, chief economist at Moody’s Analytics Inc., have projected lower cost increases.