WASHINGTON Oct 27 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.
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
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
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)