Stars line up for Freddie, Fannie deal

Senators announced a bipartisan deal to tighten the reins on mortgage giants Fannie Mae and Freddie Mac on Monday, paving the way for enactment of legislation that has eluded lawmakers for nearly a decade.

The legislation, expected to pass through committee on Tuesday, would create a new, stronger regulator for the two mortgage giants, which for years have spent their huge profits to fend off such scrutiny.

{mosads}Multibillion-dollar accounting scandals weren’t enough to spur a legislative deal to reform Fannie and Freddie, but their role in propping up the housing market in recent months has pushed critics and defenders toward compromise, people on both sides of the issue say.

“I think the key factor in why we’re here is that, when you look at the housing market, it’s clear that Fannie and Freddie play a key role — but if they’re not financially sound and properly regulated then the whole system is at risk,” said Mike House, the executive director of FM Policy Focus, a coalition representing many financial firms that compete with Fannie and Freddie.

Only a few years ago, the debate over strengthening oversight of Fannie and Freddie, also known as the government-sponsored enterprises (GSEs), hinged on whether they should exist at all.

Former Federal Reserve Chairman Alan Greenspan told Congress they should be privatized, warning that the two for-profit firms’ massive portfolios — which today total more than $1.4 trillion worth of loans and securities — posed a huge risk to the financial system.

Former Rep. Richard Baker (D-La.) pushed a bill to sever each firm’s $2.25 billion line of credit with the U.S. Treasury — an arrangement that fuels the widely held belief on Wall Street that the government would bail out the companies should they run into trouble.

Today there’s little talk of such remedies. Fannie and Freddie, congressional-chartered entities created to spur homeownership, seem to have quieted their harshest critics by coming to the rescue of the housing market this past year as investors have fled mortgage assets.

But by filling this void, the companies have badly weakened their own financial condition, posting enormous losses for the first quarter that have heightened worries on Capitol Hill that they will fail.

In an interview last week, Sen. Richard Shelby (Ala.), the top Republican on the Banking Committee, compared Bear Stearns and other global banks that have been walloped by the mortgage mess to “little grocery stores” compared with the impact a Fannie or Freddie blowup would have on the financial system.

The enterprises, which buy mortgages from the lenders that originate them, now account for more than 80 percent of all mortgages sold to investors. That is more than twice their market share in 2006.

In March, Fannie and Freddie had over $5 trillion in debts and other obligations outstanding — which is roughly equal to the publicly held debt of the U.S. government. Because of their implied government backing, the enterprises have continued to borrow at near-Treasury rates despite the credit crunch.

Earlier this year, Shelby and Banking Chairman Chris Dodd (D-Conn.) were seen as so far apart on GSE reform that the odds seemed stacked against a bill passing this year — despite House approval last year of GSE reform legislation backed by the White House.

On Monday, the senators said they had reached a deal to create a new regulator to oversee Fannie, Freddie and the 12 Federal Home Loan Banks.

The legislation would create a GSE regulator that would have yet-to-be-specified powers to raise Fannie’s and Freddie’s capital levels and to limit their portfolios. Crucially, the regulator wouldn’t derive its budget through appropriations — a process subject to lobbying by the GSEs — but through fees levied on the enterprises.

The legislation will likely toughen their requirements to finance homeownership among low-income people and is also likely to include a trust fund — drawn from a portion of the GSEs’ profits — to finance the construction of new affordable housing.

The GSEs have endured heavy criticism for years that they’ve shirked their congressionally mandated duties to reduce mortgage costs in poorer communities in favor of more lucrative investments.

“We like the GSEs. We just want them to do what their charter told them to do,” said Judith A.

Kennedy, the president of the National Association of Affordable Housing Lenders, which aims to increase the flow of private capital to low-income communities.

A bipartisan deal on such legislation is no small feat, given the firms’ lobbying clout.

The enterprises are among the top 20 biggest spenders on federal lobbying over the past 10 years, according to the Center for Responsive Politics. From 1998 through the first quarter of 2008, Freddie Mac paid $92.6 million in fees to lobbyists — more than Boeing Co., Lockheed Martin and ExxonMobil spent.  

Fannie Mae has spent $78 million on federal lobbying during that period.  

{mospagebreak}Both enterprises, while stating their support for a stronger regulator for years, have torpedoed past legislative efforts to reform their oversight.

This time, Fannie Mae seems genuinely to want legislation, partly due to the prodding of investors, whose confidence in the GSEs’ governance was badly shaken by the accounting scandals at both firms.

Lawmakers may now feel duty-bound to tighten oversight of the GSEs after pushing them to expand their market share. Since the collapse of the housing market last year, members of Congress prodded the director of the Office of Federal Housing Enterprise Oversight to loosen the capital constraints that were put on Fannie and Freddie in the wake of their accounting scandals.

{mosads}In the economic stimulus package passed earlier this year, Congress and the White House agreed to temporarily lift the cap on the size of mortgages they can buy, from $417,000 to almost $730,000, so that the GSEs could inject liquidity into the frozen jumbo loan market.

Another factor helping the legislation is the weakening economy and the tougher climate for Republicans in the fall.

Dodd has tied GSE reform to housing legislation to rescue strapped borrowers that vulnerable GOP members, particularly from states hit hard by the mortgage mess, may feel pressure to support.

Banking panel members Elizabeth Dole (N.C.), who is fighting off a tough challenger, and Sen. Mel Martinez of Florida, where foreclosures are soaring, are seen as likely supporters of the bill.

Shelby’s insistence that the affordable housing trust fund be diverted temporarily to pay for any defaults under this housing rescue plan also is likely to weaken GOP opposition to the bill.

 The Week in Congress

APPROPRIATIONS
• The Senate Appropriations Defense Subcommittee has scheduled a hearing to discuss the Defense Department’s budget request on Tuesday at 11 a.m. in 192 Dirksen. Defense Secretary Robert Gates and Adm. Mike Mullen, chairman of the Joint Chiefs of Staff, are scheduled to attend.

• The House Legislative Branch Appropriations Subcommittee has scheduled a hearing to discuss the Capitol Visitor Center on Thursday at 10 a.m. in 2359 Rayburn. Stephen Ayers, acting Architect of the Capitol, is scheduled to attend.

ENERGY
• The Senate Energy and Natural Resources Committee will examine the economic impacts of climate change legislation on Tuesday at 10 a.m. in 366 Dirksen.

• The House Energy and Commerce Energy and Air Quality Subcommittee will review a bill that would prohibit the importation of certain low-level radioactive waste into the United States at a hearing set for Tuesday at 10 a.m. in 2123 Rayburn.

ENVIRONMENT
• The House Natural Resources Committee holds a hearing on how the administration enforces the Endangered Species Act on Wednesday at 10 a.m. in 1324 Longworth. A new Government Accountability Office report is expected to be discussed.

FINANCE
• The House Financial Services Committee will hold a hearing on the impact of credit-based insurance scoring on the insurance market on Wednesday at 10 a.m. in 2128 Rayburn.
 
• The House Financial Services Committee will hold a hearing on the impact on the housing market of increased conforming loan limits on Thursday at 10 a.m. in 2128 Rayburn.

HEALTHCARE
• The House Small Business Committee’s Urban and Rural Entrepreneurship Subcommittee will hold a hearing on Medicare’s competitive bidding program for durable medical equipment on Wednesday at 10 a.m. in 1539 Longworth.

• The House Energy and Commerce Committee’s Health Subcommittee is scheduled to have a hearing on bills to fund breast-cancer research and treatment on Wednesday at 10 a.m. in 2123 Rayburn.

• The House Veterans’ Affairs Committee is having a hearing on ex-service members’ access to medical, mental health and dental care under the “wounded warrior” legislation enacted this year on Wednesday at 2 p.m. in 334 Cannon.

• The House Energy and Commerce Committee’s Oversight and Investigations Subcommittee will convene a hearing titled, “Germs, Viruses, and Secrets: Government Plans to Move Exotic Disease Research to the Mainland United States” on Thursday at 10 a.m. in 2123 Rayburn.

DEFENSE
• The Senate Armed Services Committee holds a hearing to review the nomination of Gen. David Petraeus to become the head of Central Command and the nomination of Lt. Gen. Ray Odierno to become the top U.S. commander in Iraq on Thursday at 9:30 a.m. in 106 Dirksen.

TRANSPORTATION
• The House Transportation and Infrastructure Railroads, Pipelines, and Hazardous Materials Subcommittee is scheduled to mark up the Passenger Rail Investment and Improvement Act on Tuesday at 2167 Rayburn.