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Looks like GSE reform talks will stretch into 2017, at least

The GSE debate is a fixture at this point

April 30, 2014

When the markup and vote on the Johnson-Crapo bill was delayed on Tuesday, it certainly didn’t send a positive message about the bipartisan support for the GSE reform bill.  

The vote was delayed to enable supporters of the bill to attempt to garner more support so the bill won’t simply pass by a narrow margin. They want it to pass with flying colors to send a message that bipartisan support for GSE reform is not a mirage. 

One problem remains: the lack of political will.

Whether Johnson-Crapo or one of the other three GSE reform proposals, the House’s PATH Act, the House’s HOME Forward Act, and the Senate’s Corker-Warner, actually have a chance to pass, it’s absolutely not going to happen without support from both sides of the aisle.

The thought was that Johnson-Crapo bill, sponsored by Chairman Tim Johnson, D-S.D., and Sen. Mike Crapo, R-Idaho, of the Senate Committee on Banking, Housing, and Urban Affairs, might be able to gain some momentum because it is a bipartisan bill and has some appeal to both sides of GSE debate.

Not so fast, according to analysts from Keefe, Bruyette and Woods.

They say the delay in the vote shows there is “a lack of critical mass to pass the bill and should be seen as a positive for Fannie and Freddie.”

KBW’s analysts say that they are skeptical that any of the GSE reform measures will ever pass, especially in an election year. “With a short calendar in an election year, any delay in the legislation could be fatal,” KBW’s analysts say. “At this point, we think the best the (Johnson-Crapo) bill's supporters can hope for is to pass it out of the Senate Banking Committee.”

Even if the bill does make it out of committee, which is no guarantee at this point, KBW’s analysts think the bill will “languish and die” this year.

In fact, KBW’s analysts expect the GSE and mortgage finance reform debate to last until at least 2017, when it may not even make the new president’s 100-day agenda after taking office. “We do not think the 2014 midterm elections will lead to legislation that unites different groups behind a bill, which throws the issue past the 2016 election,” the analysts say.

The analysts suggest that the still lingering tumult over Obamacare will impact any GSE reform measure. “Lawmakers feeling the sting of ‘if you like your (health insurance) policy; you can keep your policy’ will be wary, in our view, of backing legislation that can be attacked as raising the cost of a mortgage or possibly constraining liquidity and availability of the 30-year mortgage,” the analysts say.

They also cite the lack of consensus on GSE reform from housing and banking trade groups. The analysts say that a cross-industry consensus is “critical” to passage of any GSE reform measure. They also cite open hostility towards the GSE reform measures from consumer and free-market groups as another hurdle that GSE reform is unlikely to be clear.

“In the past six weeks, we have come to realize that reaching consensus on how to replace Fannie and Freddie is more elusive than we originally estimated,” KBW’s analysts say. “As we try and forecast the future, we think the chances the companies survive are better than we have previously thought.”

The survival (or death) of Fannie and Freddie is by no means a foregone conclusion, but KBW’s analysts suggest that the legislative efforts for reform may eventually evolve into turning the GSE’s into a government-run utility similar to Ginnie Mae to guarantee mortgage-backed securities.

If KBW’s analysts are right, the debate over GSE reform isn’t going away anytime soon. So maybe we (especially those on Capitol Hill) should relax and try to remember that we’re all in this thing together. Whether it’s with Fannie and Freddie or without them, we, as a collective, have to figure out how to make homeownership work for everyone. Our economy simply won’t survive without it. 

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