After Wall Street reform, Dems face fight on mortgage-finance overhaul

Democrats face a massive battle in 2011 to overhaul the $11 trillion mortgage-finance system that could make the fight over Wall Street reform look tame.
 
Politically, Democrats will enter the legislative debate with smaller majorities at best in the House and Senate, or as a minority party at the worst.
 
{mosads}Either way, with President Obama still in the White House, both parties will be under even more pressure to compromise to move legislation forward.
 
Further declines in the housing market also seem possible, which could complicate any effort to quickly overhaul the system and reduce the government’s role in supporting homeowners.

The Obama administration formally launched debate on the issue this week even as Fannie Mae and Freddie Mac, the two mortgage giants, continue to rely on a taxpayer bailout totaling nearly $150 billion.
 
The administration aims to submit its proposal for rewriting housing policy to Congress early next year. But at a summit of bankers, housing experts and others this week, senior administration officials offered a preview of their position: The government should continue to back parts of the mortgage market but play a much more limited role than now or before the financial crisis.

 
Rep. Barney Frank (D-Mass.), chairman of the House Financial Services Committee, argues the system should not include hybrid companies like Fannie and Freddie, which functioned as privately traded firms with implicit government support.
 
Frank told Fox Business Network after the summit that the government should make explicit its subsidies for low-income housing, and that a federal guarantee program for conventional mortgages should finance itself through fees.


 
While the administration and Frank appear to be moving away from either a full nationalization or privatization of the housing finance system, any government guarantee will face stinging criticisms from Republicans.
 
Striking a middle ground that can win some Republican support and retain crucial centrist Democrats will be key to passing legislation if Democrats control Congress. If they don’t, Obama will have to compromise with Republican leaders if he wants to sign a housing bill in the second half of his first term.
 
It took months of negotiations for Democrats to win the support of three Senate Republicans for the Wall Street reform bill. Much of the GOP resisted the bill because it did not touch on Fannie and Freddie. During committee, floor and conference committee debate, House and Senate Republicans argued the housing system was the underlying cause for the financial crisis and sought to brand Democrats as bailing out the companies.
 
Though Fannie and Freddie were first bailed out by the Republican administration of President George W. Bush and Treasury Secretary Henry Paulson, the GOP has blamed the Obama administration and congressional Democrats for the housing crisis.
 
On Tuesday, GOP Sens. Saxby Chambliss (Ga.), John Thune (S.D.), Mike Crapo (Idaho), Tom Coburn (Okla.) and Johnny Isakson (Ga.) again criticized the administration for not acting sooner and for treating the housing industry as a “political football.”


 
House Republicans, meanwhile, outlined a housing policy significantly at odds with the direction the Obama administration appears to be heading. 

 
“House Republicans support establishing a framework to reinvigorate housing finance that does not rely on government guarantees,” according to a summary of Republican principles circulated by Rep. Spencer Bachus (R-Ala.), the ranking member on the House Financial Services Committee.

Treasury Secretary Timothy Geithner and Frank both Tuesday sought to recognize the changing political realities. Geithner laid the blame for the meltdown of Fannie and Freddie with both Democrats and Republicans, and urged a bipartisan solution to the system. “This is a test for Washington,” he said. 


 
Frank said he intends to move legislation next year, but added: “Look, you know, it depends on who wins the House.” 


 
The political realities compound the difficulties of passing legislation while the housing market remains weak, with prices possibly continuing to fall and foreclosures mounting. The administration has put nearly $50 billion into a plan to reduce foreclosures and promote refinancing, but the effort has yet to make a major dent in the problem.


 
A push for a smaller government guarantee system would come at a time when the government’s role has grown significantly. The government now backstops roughly 90 percent of mortgages in the country, and the private market that once competed with Fannie and Freddie has come to a virtual standstill.


 
Bill Gross, head of PIMCO, the world’s largest bond firm, said at the event that the government should consider a full nationalization of the housing finance system and that it is “unrealistic” to expect private firms to represent a large share of the overall market. Any transition to a new housing system could well take years to accomplish.