Image: Freddie Mac sign
Pablo Martinez Monsivais  /  AP
With housing still staggering from foreclosures and low prices, some Republicans worry that erasing the federal role in the mortgage market could rattle the housing industry and perhaps the entire economy.
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updated 4/25/2011 8:21:46 PM ET 2011-04-26T00:21:46

Shutting down Fannie Mae and Freddie Mac should fit seamlessly into the Republican drive to shrink government. After all, keeping the ailing mortgage giants afloat has cost taxpayers $150 billion and many in both parties want private lenders to finance a bigger share of the nation's $11.3 trillion residential mortgage market.

But House and Senate Republicans pushing bills to phase out both federally run companies are learning how fear, politics and old-fashioned lobbying can trump ideology.

Even in the GOP-run House, leading proponents of doing away with Fannie and Freddie aren't predicting victory. As a precaution, they're advancing eight bills taking bite-sized swipes at the issue. In the Democratic-led Senate, a sister measure by 2008 presidential candidate Sen. John McCain, R-Ariz., faces long odds, and the Banking Committee's top Democrat and Republican are wary of quickly reshaping the market for financing home purchases.

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"There's no consensus on it," House Financial Services Committee Chairman Spencer Bachus, R-Ala., conceded in an interview this month about a sweeping overhaul bill by Rep. Jeb Hensarling, R-Texas. "I can't promise we will build consensus."

Fannie and Freddie don't issue mortgages but buy them from the original lenders, thus providing cash for more loans. They then package many mortgages into securities that they resell to investors, using a government guarantee that lets them pay a lower yield than their few competitors.

Bachus calls Hensarling's bill "the gold standard" for Republicans. It would halt government backing of Fannie and Freddie and end or dramatically reduce their role in mortgage financing within five years. The goal is to turn the mortgage market over to banks and other private lenders, who have shied away during the relentless real estate bust of the past few years.

With housing still staggering from foreclosures and low prices, some Republicans worry that erasing the federal role in the mortgage market could rattle the housing industry and perhaps the entire economy. Without the government guarantee of mortgage products that Fannie and Freddie enjoy, the cost of mortgages would likely rise, making homes less affordable.

"You can't do that," Rep. Gary Miller, R-Calif., a solid conservative and real estate developer from just east of Los Angeles, says of proposals to end the federal role in financing mortgages. "It would devastate the housing market."

Average home prices in the Los Angeles area have dropped 33 percent in five years, three times the national average, according to the Federal Housing Finance Agency.

Feeding lawmakers' concerns are realtors, mortgage bankers and home builders, powerful constituencies and campaign contributors. The bankers and builders brought throngs of members to the Capitol last month to visit legislators, and the realtors are coming in May.

"Every member of Congress has hundreds of them in their district, and they are very active," Rep. John Campbell, R-Calif., another conservative who wants to maintain a federal role in financing homes, said of realtors. "I would not discount their impact."

Though Democrats, including President Barack Obama, agree that Fannie and Freddie should be eased aside to get private lenders back in the market, Republicans generally want to move faster and further.

For many in the GOP, Fannie and Freddie epitomize government waste run amok. Under President George W. Bush, the government took them over in September 2008 as they teetered near collapse as the housing market crumbled. Taxpayers have since shoveled $154 billion at the two companies to keep them alive — which resonates at a time when efforts to trim record budget deficits are a premier national issue.

"The two largest, most influence-exerting, regulation-avoiding, bailed out institutions," Hensarling, a member of the GOP leadership, called them when he introduced his legislation last month. In a brief interview, he said that once Fannie and Freddie are gone, he "absolutely, positively, unequivocally" wants to end the government's role in the mortgage market.

Many Republicans endorse that view, and many lobbyists and congressional aides expect Hensarling's bill to ultimately move through Bachus' Financial Services Committee and the full House. But there are GOP pockets of resistance, chiefly from lawmakers worried about the practical impact of such a move, particularly in districts with high home prices and where the housing market remains especially weak.

Campbell, whose district abuts Miller's and like him is on the Financial Services panel, says the housing market is too crucial to risk destabilizing it.

Asked whether his stance was consistent with his party's philosophy of smaller government, Campbell said, "We're for smaller government and smarter government. We're not for no government and we're not for dumb government."

Working hard against sweeping changes are the National Association of Realtors, the National Association of Home Builders and the Mortgage Bankers Association. While all are major Washington players, the realtors are especially potent: The $3.8 million they donated to more than 500 congressional candidates in the 2010 election was tops among all political action committees, according to the nonpartisan Center for Responsive Politics. So far this year, they've spent another $18 million lobbying.

Vince Malta, a vice president of the realtors, said Republicans trying to end the federal role in mortgages are listening too much to their conservative tea party supporters.

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"The move here is political and not based on the reality of what is best for the housing finance system," Malta said.

The Obama administration has offered three options for phasing out Frannie and Freddie, with varying degrees of continued federal involvement, but left subsequent decisions to Congress.

The administration has said it is unilaterally taking steps aimed at reducing the two companies' housing roles and creating room for private lenders to move into the market. They include gradually increasing the fees Fannie and Freddie charge and reducing the size of their loan portfolios.

House Republicans would take similar steps in eight small bills they pushed through a subcommittee this month. They would also go further, cutting the pay of Fannie and Freddie executives to government-level salaries and ending the companies' mandates to back mortgages for lower-income people.

Copyright 2011 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

Explainer: What you can get for $500,000 or less

  • Image: Solvang home

    Each week, TODAY real estate expert Barbara Corcoran looks around the U.S. to see what homebuyers can get for their money. This week she goes from Seattle to Mobile, Ala., in search of truly unique properties you can get for $500,000 or less.

  • Seattle — $419,950 zillow

    Image: Seattle home

    3 bedrooms, 3.5 baths

    Seattle is known as the home of great coffee, great rock bands, and great tech and creative jobs. This modern house is minutes from downtown and has a high-end, energy-efficient and eco-friendly design. The exterior is wrapped in a rain screen system and covered in cedar. There's a fully fenced outdoor space and concrete block patio. All floors have radiant heating fed by a tank-less hot water system. The living room has exposed concrete floors, a gas fireplace and dual-pane high-efficiency floor-to-ceiling sliders that open onto the low-maintenance green space. The kitchen has flat-paneled oak cabinets and Chroma Quartz slab counters. The open dining room next to the sleek breakfast bar has exposed concrete floors. The bonus room on the third floor has vaulted ceilings and a private balcony with great views.

    View the listing here.

  • Mobile, Ala. — $499,500

    Image: Mobile home

    4 bedrooms, 2.5 baths

    The economy is booming in Mobile. In the last three years they've had an influx of more than 5,000 jobs and capital investments of $1.3 billion. This 1854 home in the midtown historic district is 4,300 square feet. There are four porches, a private courtyard, and the backyard is full of orange, lemon, kumquat and fig trees on the half-acre lot. The house has 13 rooms including a parlor. There are original details throughout like 12-foot ceilings, wide-plank heart pine wood floors, pocket doors, massive chandeliers and floor-to-ceiling windows. The library has built-in bookshelves and a fireplace. The cheerful kitchen has new stainless steel appliances, glass-front cabinets and lots of windows. Each bedroom has its own fireplace.

    View the listing here.

  • Corinth, Texas — $489,999 trulia

    Image: Texas home

    5 bedrooms, 4 baths

    Corinth is a bedroom community just minutes from the Dallas-Fort Worth metroplex. This is exactly what you imagine a mansion to look like, and with five big bedrooms it certainly qualifies. It's more than 4,300 square feet and was once a model home. There's a saltwater pool with a spa, a porch with an outdoor fireplace and even your own putting green. There's a sweeping staircase in the formal entryway. The formal dining room has hand-scraped wood floors and an exposed beam ceiling. The open family room has a two-story stone fireplace, niches and Sony surround sound. The open kitchen has tile floors, dark wood cabinets, an island with a sink and a granite breakfast bar. There's even a large media room upstairs with a wet bar.

    View the listing here.

  • Bozeman, Mont. — $499,500

    Image: Bozeman home

    4 bedrooms, 3 baths

    Bozeman is a charming and sophisticated college town about two hours north of Yellowstone Park. This colonial style house sits on 1.39 acres in a valley surrounded by breathtaking mountains and adjoins a 10-acre park. It has rolling green lawns, pretty flower beds, a gazebo and great views. There's a wrap-around porch on all sides of the house. The living room has ponderosa pine brushed floors, an exposed beam ceiling and gas fireplace. There's an all-brick sitting with exposed beams and a gas-or-wood fireplace. The dining room is flooded with sunshine from the extra-long windows. The kitchen looks rustic with brick floors and beamed ceilings, but has fully updated appliances

    View the listing here.

  • Solvang, Calif. — $500,000

    Image: Solvang home

    3 bedrooms, 3.5 baths

    Alisal Ranch is a 10,000-acre property in California wine country just 40 miles north of Santa Barbara and next to the charming Danish-styled town of Solvang. There are 63 homes and a resort on the ranch, along with a championship golf course and tons of riding trails. These are lease-hold properties; buyers own the house and lease the land. This secluded house is surrounded by pines, old oaks and wild roses. There's a big patio with an outdoor kitchen, a separate wood deck and mountain views everywhere. The open floor plan and vaulted ceilings make the home light and airy. There are wood floors, a two-sided stone wood burning fireplace and built-in bookshelves. There's a cozy reading nook with a built-in wine rack next to it. The kitchen has all-white cabinets, a tiled cooktop island and a breakfast bar.

    View the listing here.

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Data: Latest rates in the US

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