The Senate Banking Committee advanced its bill to wind down Fannie Mae and Freddie Mac to the full Senate 13-9, where it is unlikely to pass despite its bipartisan drafting and Democratic and Republican support.
The bipartisan bill, sponsored by Banking Committee chairman Tim Johnson and the Republican ranking member Mike Crapo, would wind down Fannie Mae and Freddie Mac and replace it with a federal mortgage insurer, which would guarantee pools of mortgage loans as long as private investors would take the first 10% of the losses.
“This bill represents our effort to draft the final chapter of financial reform by addressing the most significant unresolved issue from the financial crisis – the housing finance system,” Johnson said in a statement Thursday. “This legislation will create greater competition in the housing finance system, reducing risk to the taxpayer while ensuring affordable, fair access to all creditworthy borrowers.”
The bill’s opposition from both the left and the right reflect a fundamental difference on the government’s role in the housing market that is likely to scotch any efforts at reform and leave Fannie and Freddie in their current zombie-like, effectively nationalized state.
Some conservatives oppose it because it still maintains a large role for the government in the housing market and could still put taxpayers on the hook to support the housing market in a downturn. Alabama Republican Richard Shelby said today that his no-vote is a “vote against a government run framework that I believe overexposes the taxpayer.”
On the other hand, some liberals oppose the bill because they think it would reduce housing availability for lower income and minority borrowers. Massachusetts senator Elizabeth Warren, who voted against the bill, said today that she was “concerned that this bill in its currents form does not do enough to create housing market that works for middle class america” and would cut the number of eligible borrowers by a fifth.
Isaac Boltanksy, an analyst at Compass Point, said in a note earlier this week that “there is less than a 5% chance the GSE reform becomes law in this Congress.” Last week he said that a “floor vote on the measure is highly unlikely,” pointing to the opposition of several influential liberal Democrats on the Banking Committee, including Charles Schumer, Warren, and Ohio Democrat Sherrod Brown.
Mark Warner, the Virgina Democrat who helped draft a predecessor bill, said that the status quo was untenable, and that Fannie and Freddie could become dependent on taxpayers again should they stop receiving a stream of legal settlements from banks. “You realize there’s no profit except based on one-time settlement fees,” he said, adding that “this is a time to take this bill, improve it, and send it to the floor.”
Besides the congressional representatives who oppose the bill a motley coalition of hedge fund managers who have taken large stakes in Fannie and Freddie’s cheap stock along with Ralph Nader and some community banks object to any wind-down of Fannie and Freddie that does not address what they see as a confiscation of the money due to them as shareholders.
From 2008 to to August 2012, the Fannie and Freddie paid 10% of their earnings to the government as an annual dividend, then, as the companies were returning to massive profitability, the government amended the terms to institute a “net worth sweep” where the companies would send nearly all their profits to the Treasury and not be able to rebuild their capital bases, which would be a necessary first step to operating as independent companies.
Last summer, Richard Perry’s Perry’s Capital sued the U.S. Treasury, saying that the government’s sweep of Fannie and Freddie’s profits was a “blatant overreach by the federal government to seize all of the companies’ profits at the expense of the companies and all of their private investors is unlawful and must be stopped.”
Investors Bill Ackman, Bruce Berkowitz, John Paulson, and Richard Perry have all taken large stakes in either the common or preferred stock of the two enterprises and are bettering on either legislative or legal action to be able to get some money out of Fannie or Freddie. In the first quarter of this year, Freddie Mac had profits of $4 billion, while Fannie Mae brought in $5.3 billion.
The New York Times reported last month that Berkowitz’s fund Fairholme Capital Management, helped fund an advocacy group called United for American Homeownership which ran newspaper and television ads opposing the winding down of Fannie and Freddie.
The group said today on Twitter that the Committee vote “threatens to knock the housing market off track” and “Americans will find some reassurance that today’s lackluster vote is further proof that Johnson-Crapo is losing momentum, and quickly.”
“There’re a lot of people with money that don’t like this bill, for example hedge fund folks will not be able to take advantage of taxpayers,” said Montana Democrat Jon Tester, “and what did they do, they went out and ran ads against many of the people at this table.”
Pat Toomey, the Pennsylvania Republican who is one of the most prominent figures to speak in favor of Fannie and Freddie’s shareholders, referenced the hedge fund dispute, saying the sweep “looks an awful lot like a constitutional taking, whether or not these holders are politically popular shouldn’t matter a bit.”
After reporting their earnings earlier this month, the two enterprises have paid $213 billion in dividends to the Treasury, as part of the updated conditions of the federal government’s 2008 takeover. The two companies got $188 billion in government support to avert their collapse during the financial crisis and to keep them alive before they returned to making money on their own. Fannie and Freddie’s common stock are both down around 3% today.
Fannie Mae and Freddie Mac do not originate mortgages, they instead buy up loans and package them into securities and guarantee the principal and interest payments to investors.
Nearly every committee member, even those opposed to the bill, complimented Crapo and Johnson and their staffs for the months of work put into drafting the complex piece of legislation and all supported some resolution of Fannie and Freddie. Heidi Heitkamp, the North Dakota Democrat who supported the bill, sounded a slightly contrary note: “You know what’s a good day for the Senate? When we pass this bill out of the Senate.”