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-size 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.
“There’s no consensus on it,” House Financial Services Committee Chairman Spencer Bachus, R-Ala., conceded in an interview 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 rather 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 residential markets still staggering from foreclosures and low prices, some Republicans worry that erasing the federal role in the mortgage market could rattle the real estate 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.