A high-profile Senate bill that would dismantle Fannie Mae and Freddie Mac suffered a blow this week when key Democrats decided not to support the legislation, likely wiping out its chances of advancing to the floor this year.
The bill has enough votes to pass the Senate Banking Committee, which plans to consider the measure next week. But the bill’s sponsors — Sens. Tim Johnson (D-S.D.) and Mike Crapo (R-Idaho) — failed to win over the committee’s liberal Democrats and secure a larger majority.
Without more support, Majority Leader Harry M. Reid (D-Nev.) is unlikely to move the measure to the full chamber, and its chances of gaining traction next year are unclear. The setback comes despite bipartisan support for the bill on the committee and suggests that the effort to revamp the nation’s housing finance system could stretch on for years.
The legislation is a flashpoint in a broader battle between Fannie and Freddie shareholders and the government, which took control of the firms at the height of the financial crisis. A number of coalitions, including the mutual fund Fairholme Capital Management, have waged an expensive advertising campaign to derail the Senate bill, which would leave the government’s bailout plan in tact and set up a system that would gradually shift the risk of mortgage lending away from taxpayers to the private sector.
The investor groups have filed lawsuits challenging an arrangement that requires Fannie Mae and Freddie Mac to send all their profits to the U.S. treasury.
While there’s widespread support in Congress for the wind down of Fannie and Freddie, there’s also substantial disagreement on how to do it, which is why the bill is in trouble.
Six Democrats refused to embrace the measure, despite the encouragement of the White House. They were Sens. Jack Reed of Rhode Island, Charles E. Schumer of New York, Robert Menendez of New Jersey, Sherrod Brown of Ohio, Jeff Merkley of Oregon and Elizabeth Warren of Massachusetts, according to people familiar with the decision.
The lawmakers were concerned that the bill did not do enough to encourage lending to people with low or moderate incomes, according to Capitol Hill aides who are not authorized to speak publicly about the matter.
Fannie and Freddie are required to purchase a percentage of mortgages made for single-family homes and multi-family properties in under-served areas. The bill would get rid of those affordable housing mandates and use industry fees to provide funding for various programs designed to meet affordable housing needs.
Other worries included provisions that critics of the legislation said would tighten eligibility requirements too much for government-backed mortgages and lead to more expensive mortgages for borrowers. Supporters of the bill scrambled to tweak the measure and allay those fears, but the sides were too far apart in the end, they said.
“While it is frustrating that the effort appears to have stalled, it was always going to be a long negotiation,” said Jim Parrott, a former housing adviser in the Obama White House. “One can only hope that we can lock in the areas of consensus and continue moving forward.”
David H. Stevens, chief executive of the Mortgage Bankers Association, said he’s concerned that reaching bipartisan consensus on how best to revamp the housing finance system will get tougher going forward.
The bill has the support of at least six Democrats and six Republicans on the Banking Committee — including its chairman (Johnson) and its most senior Republican (Crapo.)
But the political landscape could change after the mid-term elections, Stevens said. “If the Senate flips to the Republican side, the entire committee leadership would likely change,” he said. “All of the continuity that has been built up over the past couple of years could be lost with a new leadership.”