A Republican-led Congress will likely be unable to reduce government involvement in the housing market before the next election, but federal agencies could still take measures to lessen risk in the system, experts say.
Sen. Richard Shelby (R., Ala.) is poised to become chairman of the Senate Banking, Housing, and Urban Affairs Committee for the second time after the GOP regained control of the chamber in the midterm elections. Shelby has been a vocal critic in the past of Fannie Mae and Freddie Mac, the government-sponsored enterprises (GSEs) whose ownership of risky "subprime" mortgage loans—which defaulted in large numbers in 2008—helped precipitate the financial crisis.
Any legislation that winds down Fannie and Freddie could stall on the Senate floor, or face a veto from President Barack Obama, experts said on Thursday at the American Enterprise Institute (AEI).
A previous Senate bill that aimed to gradually remove Fannie and Freddie from the mortgage market failed to receive a floor vote this year. Critics said it would have made the system less stable by empowering a few large bank lenders and again leaving taxpayers on the hook if the mortgages default.
Taxpayers were forced to provide $188 billion in 2008 to save Fannie and Freddie.
Peter Wallison, an AEI fellow who favors eliminating Fannie and Freddie from the mortgage market, said it was unlikely that the housing finance system would be significantly altered until 2017 at the earliest. However, Republicans can now "play offense instead of defense," he said.
Fannie, Freddie, and other government agencies currently dominate the housing market by purchasing more than 90 percent of the mortgage loans. The companies’ regulator, the Federal Housing Finance Agency (FHFA), sparked a backlash last month when it announced that it would soon lower lending standards for mortgages by permitting smaller down payments.
"Giving the government checkbook to profit-making companies like Fannie and Freddie is not a good system," Wallison said.
"And ultimately, as long as the government is in control, we will produce some of the same type of problems we had with Fannie and Freddie," he added, such as weaker underwriting standards and mortgage defaults.
Legislation that reduces the role of the GSEs is likely to face stiff resistance from what Josh Rosner, managing director of research consultancy Graham Fisher & Co., called the "housing industrial complex"—a coalition of affordable housing advocates, lenders, realtors, homebuilders, and sympathetic lawmakers. The group supported some of the government’s affordable housing goals that critics say lowered lending standards, and led to numerous mortgage defaults, before the 2008 downturn.
"It’s going to be difficult to get [legislation] through Congress if it leads to a substantial increase of cost for first-time homebuyers," said Michael Fratantoni, chief economist at the Mortgage Bankers Association.
A new bill could also become mired in the Senate Banking Committee due to lawmakers’ sharply conflicting views about the goals of housing finance reform.
Shelby opposed the Senate housing bill earlier this year because he thought it still preserved too much government interference in the market. Sen. Sherrod Brown (D., Ohio), who will be the ranking Democrat on the committee, voted against it for the opposite reason—that it did not do enough to promote affordable housing.
A spokesperson for Shelby declined to comment on the senator’s priorities for the next session. A spokesperson for Brown did not respond to a request for comment.
Rosner said agencies could still take administrative actions to diminish the risk to taxpayers in the mortgage market, in lieu of a broader legislative overhaul. Regulators could allow Fannie and Freddie to retain some of their earnings, which they currently must hand over to the Treasury Department.
The GSEs’ lack of capital could expose taxpayers to another bailout if a crisis occurs.
Alex Pollock, an AEI resident fellow, proposed requiring Fannie and Freddie to maintain minimum equity capital of 5 percent, like other large banks.