“A package that gives the bigger banks a broad role in packaging loans while ensuring community banks have unfettered access to mortgage securitizations is the best way to build industry support for legislation,” Jaret Seiberg, an analyst at Guggenheim Securities LLC’s Washington Research Group, wrote in a policy note.
But the way the government structures the loss and capital requirements could make it more difficult for borrowers to get a home loan. Lenders are sure to pass any additional costs they incur on to consumers. Capital requirements will likely be much greater for borrowers with low down payments and credit scores, which means those on the margins of the financial system could wind up paying more for a mortgage, Stevens said.
“Making sure that the first loss and private capital up front is substantial enough to protect the taxpayers, but not overly burdensome to the point where it restricts access to credit, is the dynamic tension we’ll be looking at in the coming weeks,” he said.
Despite calls by lawmakers and others to abolish Fannie and Freddie, the Obama administration has not offered any substantial plans to revamp the housing finance system since the government placed the firms in conservatorship in 2008. Rather, it has laid out options.
A White House spokesperson said Tuesday that the president “welcomes this bipartisan effort on reforming our housing finance system.” The administration wants to ensure that whatever system replaces Fannie and Freddie protects “the 30-year fixed-rate mortgage and broad and affordable access to housing for responsible working families from all communities,” the person said.
Getting the Corker-Warner bill through the House will be an uphill battle. House Financial Services Chairman Jeb Hensarling (R-Tex.) has been a strong proponent of fully privatizing the system.
“The GOP-controlled House is a real obstacle to reform even for measures that enjoy bipartisan support in the Senate,” Seiberg said. “One only has to look at the farm bill to see how more radical interests in the Republican Party can defeat a bill that emerged from the Senate on a bipartisan basis.”
There is a small chorus of investors who support restructuring, rather than eliminating, Fannie and Freddie. The tide of opinion started to turn some after Fannie May posted a record $7.6 billion in profits in the final quarter of 2012, making observers wonder whether they could survive without government support. Last month, Fannie Mae repaid the government $59.4 billion.
The overwhelming momentum, however, is behind doing away with the mortgage finance giants.