Q+A-Elections to shape US mortgage reform, someday

WASHINGTON Wed Oct 27, 2010 2:10pm EDT

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WASHINGTON Oct 27 (Reuters) - U.S. elections on Tuesday will help answer one of the biggest financial question marks looming over Washington: How to fix the nation's $10 trillion housing market. But don't expect quick action from Congress -- no matter which party comes out the winner.

Lawmakers approved sweeping reforms for Wall Street and banks in July 2010, but they didn't address the future of Fannie Mae (FNMA.OB) and Freddie Mac (FMCC.OB), the mortgage finance giants seized by the government in 2008.

Both Democrats and Republicans have vowed to make an overhaul of housing finance a top priority in 2011-2012.

Their ideas differ in important ways, however, and analysts doubt enough consensus exists to hammer out a compromise soon.

Here is a question-and-answer look at the issue:

WHAT ARE FANNIE MAE AND FREDDIE MAC?

Fannie Mae and Freddie Mac are known as government-sponsored enterprises, or GSEs, were set up by Congress to add stability and liquidity to the mortgage market. They buy mortgages and then hold them, or bundle them and sell them as securities to investors.

WHAT HAPPENED?

In the house-price bubble a few years ago, the GSEs followed banks into subprime mortgage lending and loaded up on high-risk loans. When the housing prices fell, the economy plunged into a recession and many homeowners were unable to pay their mortgages. Fannie and Freddie took heavy losses.

Fearing disaster, the Bush administration in September 2008 seized the GSEs and put them under direct government control.

WHERE DO THEY STAND NOW?

Fannie and Freddie are now money-losing government enterprises that guarantee 80 percent of new mortgages. The two have soaked up $148 billion in bailout money. Taxpayers could be on the hook for $215 billion more through 2013.

So, lawmakers face a tough challenge: stop the bleeding at the GSEs; find a better way for people to get a mortgage; and, don't undermine the already fragile economic recovery.

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WHAT DO POLITICIANS WANT TO DO?

The Obama administration and most congressional Democrats want a fundamental overhaul, but they say they want to preserve some government guarantees in the mortgage market.

Some top Republicans say they want to get the government out of the mortgage business by privatizing the GSEs, but they have provided few details of how that would work.

The main issues that drive the GSE reform debate are questions about their mission, investment portfolios and the guarantee of government backing. Since the last congressional push some five years ago, Democrats have become willing to accept greater change while Republicans are still fiercely critical of the GSEs.

WHAT IF REPUBLICANS TAKE THE HOUSE?

If Republicans win control of the House of Representatives, Spencer Bachus is on track to become chairman of the financial services committee, which oversees the GSEs.

Key subcommittees would come under the control of libertarian Ron Paul and conservatives Scott Garrett and Jeb Hensarling, who favor less government involvement in housing finance than most in their party.

Bachus may be challenged from within Republican ranks for the chairmanship. No matter who gets it, Republicans on the financial services committee are lined up to the right of general Republican opinion, making an intraparty split possible.

That could prevent legislation from moving forward.

WHAT ABOUT THE SENATE?

Democrats are expected to retain control of the U.S. Senate, where banking committee Chairman Christopher Dodd is retiring this year. If Democrats prevail, Dodd will likely be replaced early in 2011 by Tim Johnson of South Dakota.

If Republicans win the Senate, Richard Shelby would chair the banking committee. He, too, favors GSE privatization.

But Johnson and Shelby are both cautious legislators and would not rush housing finance legislation. If the House can't move quickly on GSE legislation, the Senate won't either.

WHEN WILL HARD DECISIONS BE MADE?

The Treasury Department is expected to unveil a plan on housing finance by January. Nothing will happen before that, and probably not for a long time afterward, analysts say.

"This is a 2011 story and could extend past the 2012 elections," said Teddy Downey and Chris Krueger, policy analysts at research firm Concept Capital.

Congress will likely hold numerous hearings, with House Republicans heaping blame for the crisis on Fannie Mae and Freddie Mac.

A partisan split over government mortgage guarantees will likely produce gridlock, said Joseph Engelhard, policy analyst at research firm Capital Alpha, on a conference call.

"What we may in effect have is a delay where nothing gets done. Ironically, that may help Fannie and Freddie in the sense that the status quo might be preserved for at least another two or three years," he said.

One wild card? The impact of the home foreclosure crisis. (Editing by Jackie Frank)

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