September 13, 2011 / 5:26 PM / 8 years ago

Lawmakers debate housing finance reform

WASHINGTON (Reuters) - Top Senate lawmakers on Tuesday laid bare long-standing differences on how to wind down government-sponsored mortgage enterprises Fannie Mae and Freddie Mac, underscoring the difficulty Congress will face in revamping the U.S. housing finance system.

Democrats and Republicans alike agree both entities should be wound down but whether the government should still have a role subsidizing housing finance is still unsettled.

“I am concerned about the unintended consequences for our housing market and economy that could result if a government role is eliminated completely,” Senate Banking Committee Chairman Tim Johnson, a South Dakota Democrat, said during the panel’s tenth hearing on housing finance reform.

He said that record low mortgage rates, which currently hover around 4 percent, would likely jump across the country if the government backstop is diminished.

Fannie Mae and Freddie Mac, the two congressionally chartered mortgage behemoths seized by the government in 2008 as losses on subprime loans mounted, are critical to the housing market. They provide financing to banks and lenders by purchasing mortgages and either keeping them on their books or packaging them for sale to investors.

The firms have already soaked up $170 billion in taxpayer dollars since they were placed under government control.

“We need a private system to enable institutional investors,” Peter Wallison, a fellow with the conservative American Enterprise Institute, told the panel. “We are forcing the taxpayers to take the risk the government is taking.”

Senator Richard Shelby, the top Republican member on the committee, said there needs to be a “political will” to end the government backstop in the mortgage market and limit taxpayer losses. He said the histories of Fannie Mae and Freddie Mac “play out like a horror movie.”

“Federal guarantees were often viewed as ways to subsidize homeownership,” he said. “It is clear the old way of doing things failed on a massive scale.”

Any legislation to lessen the government’s footprint in housing finance has to get through both a Democrat-controlled Senate and Republican-led House of Representatives. It is likely to be a multi-year effort to complete reforms.

Republicans in the House have proposed legislation and alternative housing finance systems, but none have reached the House floor for a vote.

The first test of how difficult it might be to wean the housing market off government support will come at the end of the month when the so-called conforming loan limit drops back to pre-financial crisis levels.

The loan limit puts a cap on the size of mortgages that the Federal Housing Administration, Fannie Mae and Freddie Mac can guarantee. They are set to fall from $729,500 to $625,500 on October 1 in the highest-priced real estate markets.

Three years after taking control of Fannie Mae and Freddie Mac, the government now backs nearly nine in 10 new mortgages.

Editing by James Dalgleish

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