Key Democrats Join to Say No to Housing Finance Overhaul

By Cheyenne Hopkins  May 9, 2014 5:41 AM GMT+0800  

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Photographer: Win McNamee/Getty Images

U.S. Sen. Charles Schumer (D-NY) speaks with reporters following the weekly policy... Read More

Six Democrats whose support is crucial to a Senate plan to replace government-owned mortgage firms Fannie Mae and Freddie Mac have decided they will not support the proposal without major revisions, dimming its chances of becoming law.

The six senators held a private meeting today and agreed that they would not support the bipartisan bill, which would replace the finance companies with a government re-insurer, according to three people familiar with the meeting. A lack of Democratic consensus scuttled plans last week to approve the bill by the Senate Banking committee.

The six senators -- Charles Schumer of New York, Sherrod Brown of Ohio,Jeff Merkley of Oregon, Robert Menendez of New Jersey, Elizabeth Warren of Massachusetts, and Jack Reed of Rhode Island -- agreed that the structure of the re-insurer seemed unworkable and the bill lacked sufficient support for affordable housing goals.

The opposition of those six Democrats could make moving the housing bill to the floor difficult this year. Senate Banking Committee Chairman Tim Johnson and Senator Mike Crapo of Idaho, the top Republican on the panel, have the backing of six Democrats and six Republicans on the 22-member committee. However Senate Majority Leader Harry Reid has said the bill needs to attract more support from Democrats, who hold a slim majority in the chamber, before he will bring it to the Senate floor for a vote.

Broadening Support

“We know we have the votes to pass it out of committee,” Senator Bob Corker, a Tennessee Republican who helped draft an early version of the plan, said in an interview yesterday. “The question is, can we broaden support? I don’t think we can say yet how that’s going to work out.”

Isaac Boltansky, a policy analyst at Compass Point Research and Trading LLC in Washington, said the six Democrats’ support is crucial for advancing the bill.

“The Johnson-Crapo package will still likely clear the committee, but without any of the six targeted Democrats signing on it is highly doubtful that the measure will get a floor vote,” Boltansky said. The overhaul would be “effectively dead until 2015.”

The bill would create a Federal Mortgage Insurance Corporation to provide insurance for mortgage-backed securities. It also would allow banks to be an aggregator, guarantor, securitizer and lender of mortgages.

The bill relies on incentives to persuade financiers to lend to groups with higher risk profiles. Consumer and civil-rights advocates are pushing instead for a mandate that those groups be served.

In recent weeks, the bill’s supporters had courted Warren for her support, said two of the people. Warren has previously said that any housing measure needed to include explicit affordable housing goals, not just incentives.

Affordable Housing

“The affordable housing standards issue and the duty to serve I think are important,” Brown said at a Bloomberg breakfast last month. “I don’t think they’re addressed in the way they should be. I think there is increasing sentiment I hear from people from all over the financial services sector, from Wall Street to community banks to credit unions, that say, ‘How is this going to work?’”

Johnson postponed a committee vote on April 29 to provide more time to build Democratic support. He has said he was aiming to reconvene the panel next week.

The Johnson-Crapo bill would phase out Fannie Mae and Freddie Mac over a five-year period and replace them with federal insurance for mortgage bonds that would kick in only after private investors were wiped out. Current shareholders of Fannie Mae and Freddie Mac would be in line behind the U.S. government in getting any compensation from the wind-down.

The bill is based off a framework introduced last year by Corker and Mark Warner, a Democrat from Virginia.

“If we don’t get this right, we’ll create major disturbances in the housing market which will have a profound impact on families, on homeownership and certainly on our national economy,” Merkley said in an interview on April 29.

To contact the reporter on this story: Cheyenne Hopkins in Washington atchopkins19@bloomberg.net

To contact the editors responsible for this story: Maura Reynolds atmreynolds34@bloomberg.net Anthony Gnoffo