Senate rejects GOP's Fannie, Freddie plan

WASHINGTON (Reuters) - The Senate on Tuesday voted to reject a Republican measure that would have moved housing finance giants Fannie Mae and Freddie Mac out of government conservatorship within two years.

The measure was offered by Republicans John McCain, Richard Shelby and Judd Gregg as an amendment to a sweeping Democratic financial reform bill that does not deal decisively with the problem of what to do about Fannie and Freddie.

"You cannot have responsible reform of financial services and leave out Freddie and Fannie," said Republican Senator Johnny Isakson in debate on the amendment dealing with the two groups, known as government-sponsored enterprises, or GSEs.

The Senate approved, by a vote of 63 to 36, a Democratic measure calling for a study of housing finance reform, due by January 31, 2011. The Republican amendment failed 43 to 56.

Democrats said the Republican amendment, lacking an alternative proposal for structuring housing finance, could have upended the home market just as it was stabilizing.

"What it says is that in 24 months, you get rid of Fannie and Freddie. I don't call that reform," said Senator Christopher Dodd, the Democratic chairman of the banking committee and author of the sweeping Wall Street reform bill.

More than 96 percent of all U.S. residential mortgages are backed by the government. Fannie and Freddie, despite deep problems, remain the dominant players in that system.

"This program needs to be fixed, no question about it, but this amendment doesn't do that." Dodd said, arguing that the amendment would have put the housing market in "a free-fall."

He said: "We could fall right back into a recession ... It would be a drastic mistake."

McCain, Shelby and Gregg would have required the government to relinquish control of Fannie and Freddie within two years.

'TEMPORARY' STATUS STILL IN PLACE

At the height of the financial crisis in 2008, The Bush administration seized the two entities and put them in "temporary" conservatorship as mortgage losses mounted.

More than a year and a half later, the groups' status has not changed and the Obama administration has not decided how it wants to overhaul the entire U.S. housing finance system.

The Republican amendment would have forced an end to the conservatorship within two years of the law's enactment.

The amendment would also have stripped Fannie and Freddie of their mandate to promote affordable housing and would have sharply reduced the government's role in mortgage finance.

The amendment also called for placing Fannie Mae and Freddie Mac on the books of the federal government.

Fannie Mae on Monday asked the U.S. Treasury for an additional $8.4 billion to backstop losses. The two firms have already tapped about $145 billion from Treasury and their regulator said earlier Tuesday that he does not know how much support the groups will ultimately need from taxpayers.

(Additional reporting by Corbett Daly, Editing by Andrew Hay)