Fannie Mae and Freddie Mac just won’t stay down no matter how much punishment the government throws at them.
In a rare moment of agreement, both parties in Washington want to dismantle Fannie and Freddie as part of an overhaul of the U.S. housing system. However, that consensus is weakening in the face of stiff opposition from regional banks, hedge funds and other institutions, according to a Bloomberg report.
Adding fuel to the fire are the record profits Fannie and Freddie have been posting – almost all of which go to the Treasury since the companies were bailed out and placed under government conservatorship in 2008. So far, Fannie and Freddie have paid about $146bn to the Treasury, according to Bloomberg.
But both Democrats and Republicans have been eager to scrap the mortgage giants and start over. A Senate bill being drafted by Democrat Tim Johnson of South Dakota and Republican Mark Crapo of Idaho would wind down Fannie Mae and Freddie Mac in five years, replacing them with a new government insurer and moving more of the risk to private capital. House Republicans, meanwhile, want to dismantle Fannie and Freddie without providing any replacement. A bill that would essentially privatize home finance entirely, the Protecting American Taxpayers and Homeowners (PATH) Act, passed the Financial Services Committee in July without Democratic support.
But some congressional Democrats are unsure Fannie and Freddie should be demolished rather than refurbished. In August, Senate Majority Leader Harry Reid (D-Nev.) broke with President Barack Obama to oppose dismantling the government-sponsored enterprises, and last week Senate Banking Committee Member Robert Menendez (D-N.J.) also expressed doubt.
“I’m not sure that eliminating the GSEs totally makes sense, as some have suggested, and so I have an open mind on it,” Menendez said in an interview.
Private investors, meanwhile, are lobbying hard to preserve Fannie and Freddie. Hedge funds Paulson and Co. and Perry Capital, which own preferred shares in the GSEs, have urged Congress to preserve Fannie and Freddie, arguing that introducing an entirely new system could destabilize the market, Bloomberg reported.
Community banks are also pushing to keep the GSEs intact, fearing a new system would just introduce new regulatory hoops to jump through.
“For a community bank, the process for gaining access to the secondary market would be more difficult than it is today,” Camden Fine, president of the Independent Community Bankers of America, told Bloomberg.