Members of the U.S. Senate Banking Committee said they’d keep working to overhaul the housing finance system after casting a narrow vote to advance a bill that would wind down Fannie Mae and Freddie Mac.
Six Democrats and seven Republicans on the 22-member panel voted for the measure. While that’s technically enough to move the bill forward, the lack of broader support from Democrats will probably keep it from gaining a vote of the full Senate this year.
Senator Tim Johnson, the South Dakota Democrat who leads the panel, and Senator Mike Crapo of Idaho, the top Republican, acknowledged that they needed more backing.
“After exhausting every option to try and strike a deal quickly that would add votes at the committee level, I have concluded it is best to move forward with the majority we have now in committee and continue working to build support for the bill as it moves to the floor,” Johnson said at a hearing where the vote was cast.
The bill would replace the U.S.-owned companies over five years with federal insurance for mortgage bonds that would kick in after private investors were wiped out. Current shareholders of Fannie Mae and Freddie Mac would be in line behind the U.S. for compensation from the wind-down.
Committee members who voted against the plan said they don’t support the current housing-finance system, in which Fannie Mae and Freddie Mac back almost two-thirds of new home loans.
“My opposition should not be interpreted as opposition to reform of any kind because we’re all interested in reform,” said Richard Shelby, an Alabama Republican. “It’s a vote against a complicated government-run framework that I believe overexposes the American taxpayer and creates more problems than it solves.”
Johnson and Crapo, the bill’s authors, postponed action on the bill until today to try to gain more Democratic backing. Their efforts fell short when six senators agreed in a private meeting to oppose the measure.
Senate Majority Leader Harry Reid said he would bring the bill to the floor for a vote of the full body only if it drew overwhelming support from most of the committee’s Democrats.
With Johnson stepping down as chairman at the end of the year and Democratic control of the Senate at risk in November elections, the effort to remake the housing-finance system probably will have to restart in 2015. Federal Insurance
Democrats remained divided over lending in disadvantaged communities, big-bank dominance of the mortgage market and the powers of a new regulator.
Democrats Jeff Merkley of Oregon, Elizabeth Warren of Massachusetts, Charles Schumer of New York, Sherrod Brown of Ohio, Robert Menendez of New Jersey and Jack Reed of Rhode Island voted against the bill.
In addition to Johnson and Crapo, the bill received support from its 10 co-sponsors and Senator Tom Coburn, a Republican from Oklahoma.
“It’s not the best answer but it’s better than doing nothing,” Coburn said in an interview. “Doing nothing is not acceptable.”
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 neared insolvency. The companies, which buy mortgages and package them into securities, were bailed out with $187.5 billion from the Treasury and backed a growing share of mortgages as private capital dried up.
Only recently did they return to financial health as the housing market recovered, sparking calls from private shareholders including Bruce Berkowitz’s Fairholme Capital Management and hedge fund Perry Capital LLC to share in profits now going to taxpayers.
Fairholme and Perry Capital are pushing the U.S. to return the companies to private ownership, saying shareholders should benefit from their holdings. They have filed lawsuits challenging an arrangement in which the U.S. now keeps 100 percent of Fannie Mae and Freddie Mac’s profits as a return on the government bailout. The bill says lawmakers would leave that decision to the courts.
Melvin L. Watt, director of the Federal Housing Finance Agency that oversees Fannie Mae and Freddie Mac, said on May 13 that he would reverse a previous effort to shrink the companies’ footprint in U.S. housing finance and take steps to encourage banks to issue more mortgages.
Check out Gundlach: Golden Age of Housing Is Over on ThinkAdvisor.