Why We Might Be Saying Good-bye to Fannie and Freddie

by James McClister

The U.S. Senate has taken a step towards reforming Fannie Mae and Freddie Mac, only it might be in the wrong direction.

Go back five or six years and you’d be hard pressed to find a news outlet not touting the inevitable reform of the U.S housing finance system by way of dismantling Fannie Mae and Freddie Mac. On both sides, it seemed legislators were ready to pounce.

Fast-forward to today, and the debate has all but faded from the public arena. That was, at least, until mid-May of this year when Sen. Mike Crapo, R-Idaho, and Sen. Tim Johnson, D-S.D., brought the Housing Finance Reform and Taxpayer Protection Act – nicknamed Johnson-Crapo – to the Senate Committee on Banking, Housing, and Urban Affairs, where Crapo is the sitting chairman.

So Long, Fannie and Freddie

The bill, which narrowly passed the committee with a 13-9 vote, proposes what essentially amounts to the phasing out of Fannie Mae and Freddie Mac – and not in a way where shareholders are going to turn a big profit. If passed:

  • The bill would slowly wind down Fannie Mae and Freddie Mac.
  • Housing oversight would be taken over by the newly created Federal Mortgage Insurance Corporation – currently backstopped by the Mortgage Insurance Fund.

Supporters of Johnson-Crapo claim the transition would usher in a more sustainable system, one not encumbered by unacceptable lending risks. However, opponents tell a different story.

Where Does It Go From Here?

The bill is supported by a number of financial and housing agencies and associations, including the Credit Union National Association, National Association of Federal Credit Unions, National Association of Realtors, National Association of Home Builders, the National Housing Conference and Habitat for Humanity. Still, many in the Senate and others familiar with the legislation say it’s likely “dead in the water.”

One particularly outspoken critic, Sen. Elizabeth Warren, D-Mass., has suggested the bill simply doesn’t do enough for middle class America.

“It is harder to get a Freddie or Fannie mortgage than at any time in history. [Johnson-Crapo] would cut the pool of qualified borrowers by 20 percent, “ Warren told Housing Wire. “Think about that, one in five families who would be eligible today would not be.”

Curious by the reignited debate over housing finance, Compass Point Research & Trading published a note spelling out the various scenarios facing Johnson-Crapo. While Compass Point hasn’t actively lobby against the legislation as Sen. Warren did, the group does point out that the current political climate is not in the bill’s favor.

“Depending on the result of the midterm election, and internal Senate politics thereafter, we believe one of four Senators will be the next Chair of the Senate Banking Committee: (1) Senator Shelby; (2) Senator Brown; (3) Senator Crapo; or (4) Senator Schumer. Of these four, only Senator Crapo voted in favor of the legislation,” Compass Point’s analysts say.

Compass Point ended its note saying the most likely scenario is that Senate Majority Leader Harry Reid, D-Nev., considering the surrounding legislative and political concerns, will table the bill, adding credence to what many have suggested: Johnson-Crapo is dead in the water.

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