• Key Democrats oppose Fannie-Freddie overhaul

By Nick Timiraos

Bloomberg

The Fannie Mae headquarters building stands in Washington, D.C., U.S., on Monday, Aug. 9, 2010.

Talks between top lawmakers on the Senate Banking Committee and a group of Democrats seen as key swing votes to advance a bipartisan overhaul of Fannie Mae FNMA +3.37%  and Freddie Mac FMCC +3.41%  broke down Thursday, according to people familiar with the matter, raising the prospect that the bill won’t advance beyond the committee this year.

Lawmakers last week postponed a committee vote on the overhaul bill, unveiled in March by Sens. Tim Johnson (D., S.D.) and Mike Crapo (R., Idaho), the heads of the committee, to wrest more support from the 22-member panel.

Lawmakers said last week they could have passed the bill with a narrow majority, but many analysts believe a larger “supermajority” would be needed to compel Sen. Majority Leader Harry Reid (D., Nev.) to bring the bill up for a floor vote ahead of the November midterm elections.

Efforts over the past week had focused on winning three of six uncommitted Democrats on the panel: Sens. Elizabeth Warren of Massachusetts, Charles Schumer of New York and Robert Menendez of New Jersey. Consumer and civil-rights groups had raised a series of objections to the proposed bill.

The Obama administration has worked behind the scenes to forge compromises on a series of technical issues designed to ensure broad mortgage-credit access and to curb the ability of big banks to grow even bigger under any privatized market.

The Johnson-Crapo bill would construct a complex new market system in which private investors would take initial losses on mortgage securities that would carry government reinsurance. Fannie and Freddie don’t make loans but buy them from lenders and issue them as securities, providing guarantees to make bondholders whole when loans default. Their infrastructure has made the 30-year, fixed-rate mortgage widely available to American borrowers.

Fannie and Freddie remain in a government-managed conservatorship, and they can’t escape federal control without an act of Congress or a move by the Treasury Department.

If the bill falters, U.S. control would continue, though lawmakers might eventually look to restructure rather than replace the firms. The Obama administration has said it flatly opposes that option because it wouldn’t address the firms’ duopoly status.

Fannie and Freddie required $188 billion in taxpayer support between 2008 and 2011. But buoyed by extensive government support and a recovering housing sector, the firms have returned $203 billion to the Treasury in dividend payments. The companies reported combined profits of $9.3 billion for the first quarter Thursday, which will result in another $10.2 billion in payments to the Treasury next month.

Hedge funds and other distressed-equity investors have bet that the firms will be revived by Congress or restructured in a way that restores value to shares, which were left for dead when the companies were seized by the U.S. in 2008. Critics of the bill have argued that the proposed reforms will sharply raise borrowing costs while doing little to prevent a rerun of the mortgage-credit bubble of the past decade.

A key point of contention in recent days on Capitol Hill: how to replace so-called affordable-housing goals, which the Johnson-Crapo bill would repeal. For years, regulators required Fannie and Freddie to target a certain percentage of their mortgage purchases toward low- and moderate-income borrowers and certain “underserved” markets, such as rural areas and inner cities.

Some liberal interest groups have raised concerns that without some kind of federal lending mandate to serve all borrowers among any successors to Fannie and Freddie, mortgage guarantors would cherry pick only the best loans.

Those goals are deeply unpopular with some conservatives who believe they fed Fannie and Freddie’s push into riskier lending, though economic research has suggested that the goals weren’t terribly effective and weren’t a primary driver of increased risk-taking.

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