WASHINGTON The leaders of the Senate Banking Committee appear unlikely to meet their goal of producing a bill by year-end that would wind down major mortgage finance companies Fannie Mae (FNMA.OB) and Freddie Mac (FMCC.OB), given the shrinking timeline and the tricky politics.
Conservative Republicans favor shutting down the government-run firms and placing control of the nearly $10 trillion housing finance system firmly in the private sector's hand.
But liberal Democrats worry that less affluent Americans will lose access to mortgages even if a limited government role is retained, unless there are safeguards to ensure the availability of credit for all borrowers.
Committee Chairman Tim Johnson and Senator Mike Crapo, the panel's top Republican, have been working together closely to bridge the partisan divide.
Crapo has agreed that some sort of government backstop for the mortgage market, which loan guarantors Fannie Mae and Freddie Mac now dominate, should be retained - a fact analysts see as a political breakthrough.
"The committee is being proactive, but the big question will wind up being - what price does Senator Crapo want to extract for giving support to a federal guarantee?" said Brandon Barford, a former Republican aide to the committee who is now a vice president at ACG Analytics, an investment research firm.
The goal is to craft a system that provides continued access to long-term, fixed-rate mortgages, while limiting the risk taxpayers will ever face losses.
Fannie Mae and Freddie Mac, which buy mortgages from lenders and repackage them into securities for investors, were bailed out to the tune of $188 billion after the government seized them in 2008 as defaulting loans threatened their solvency.
But threading the needle between centrist lawmakers, liberal Democrats and conservative Republicans is proving difficult, even with the Obama administration's heavy involvement.
And while the Democratic and Republican leaders of the committee are still talking, and staff are working to flesh out details, some Senate aides said a draft bill will not be ready for the panel's consideration until 2014. An agreement in principal, however, is likely, according to sources.
STARTING POINT ON LONG PROCESS
Johnson, who has overseen a flurry of hearings on housing reform in recent weeks, said he has worked closely with Crapo to increase the odds of reaching a deal that can secure enough bipartisan votes to win full Senate approval.
"Because of our inclusive, deliberative process, we have more buy-in on the importance of reform from members on both sides of the aisle, the administration, and those in the housing industry as well as housing advocates," the South Dakota Democrat told Reuters.
"I remain hopeful that Ranking Member Crapo and I can reach agreement on legislation that is workable and will improve the stability of the housing market," he said.
Barford said that Crapo's demand for signing off on some sort of government mortgage guarantee, even one that might only kick in during catastrophic situations, "will be very strict underwriting standards to protect taxpayers."
Johnson and Crapo are building on a bipartisan bill crafted by Republican Senator Bob Corker and Democratic Senator Mark Warner.
That proposal would wind down Fannie and Freddie and replace them with a new government reinsurer. It would mandate private financiers to hold a stake and take at least 10 percent of the first losses on mortgage debt. The government would only provide assistance after private creditors had taken a hit.
By including a government guarantee in the overhaul plan, lawmakers on both sides of the aisle are conceding that a federal backstop is necessary to keep the cost of mortgage financing low and access to credit widely available.
But left-leaning groups still worry the pendulum will swing too far and say ensuring broad access to mortgages is essential.
"If we're going to have the votes to move to a new housing finance system, any new reform measure will have to replicate Fannie and Freddie's mission to serve all markets," said Julia Gordon, director for housing finance and policy at the Center for American Progress.
"Legislation will fail to make it out of the committee process unless lawmakers beef up the proposal to ensure it serves all players in the (housing) market equitably," she said.
Even if their draft does not make it to the Senate floor, anything Johnson and Crapo produce will be a starting point for whatever Congress may eventually approve.
Any housing reform plan passed by the Democratic-controlled Senate must also make its way through the Republican-controlled House before it could be signed into law.
Industry experts and political analysts do not expect that to happen before the mid-term elections in November 2014, and probably not until after the next presidential election in 2016.