Bipartisan Fannie, Freddie reform bill clears Senate panel, but unlikely to advance

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A bipartisan measure to wind down the government-run failed mortgage businesses Fannie Mae and Freddie Mac and overhaul the U.S. housing finance system cleared the Senate Banking Committee Thursday. The bill, however, is not likely to advance in the Senate this Congress.

It was the Senate Banking Committee's second attempt to approve the bill sponsored by Chairman Tim Johnson, D-S.D., and ranking member Mike Crapo, R-Idaho. Johnson delayed the mark-up of the bill in April to seek additional Democratic votes. Johnson acknowledged Thursday that that effort came up short, saying that "after exhausting every option to try and strike a deal quickly that would add votes at the committee level, I have concluded it is best to move forward with the majority we have now in committee and continue working to build support for the bill as it moves to the floor."

The committee voted to advance the measure Thursday in a bipartisan 13-9 vote, with liberal Democrats such as Elizabeth Warren of Massachusetts, Jeff Merkley of Oregon and Sherrod Brown of Ohio opposing it on the grounds that it would fail to serve some creditworthy groups, especially minorities, and would expand the size of the biggest banks.

"The bill would allow the too-big-to-fail banks to grow bigger still," Warren said.

The Johnson-Crapo legislation would gradually wind down Fannie and Freddie, in the government's stewardship since failing in 2008. Fannie and Freddie buy mortgages from lenders, package them into securities, and provide government-backed guarantees. In the system envisioned in the Johnson-Crapo bill, that function would be performed by private companies, with a government backstop in place if private losses exceeded 10 percent.

Senate Majority Leader Harry Reid has signaled that he's unlikely to bring the bill to the Senate floor without strong Democratic support. In addition to the nay votes from Warren, Merkley and Brown, the measure was opposed by Democrats Robert Menendez of New Jersey and Charles Schumer of New York, the number-three Democrat in the upper chamber.

Sen. Bob Corker, R-Tenn., who with Sen. Mark Warner, D-Va., was one of the sponsors of the original draft legislation on which the chairman's bill was based, noted that the 2010 Dodd-Frank financial reform bill passed the committee with weaker support and was taken up by Reid. Dodd's bill cleared the committee 13-10 in March 2010.

Thursday's vote concludes 18 months of Senate Banking Committee work on the legislation, but its fate remains uncertain. Last summer, Republicans on the House Financial Services Committee approved a measure, without bipartisan support, that also would end Fannie and Freddie and usher in a new system without a government guarantee for mortgage-backed securities. That bill similarly has failed to gain traction in the broader chamber.

During discussions over the Senate committee's draft Thursday, senators addressed an issue that has arisen as the two government-sponsored enterprises have returned to profitability, namely that some investors in the publicly traded companies have sued the federal government for taking all of the companies' income as dividends, without returning anything to taxpayers.

Sen. Jon Tester, D-Mont., noted that one of the benefits of the legislation is that “hedge fund folks will not be able to take advantage of taxpayers,” a reference to the litigation.

For his part, Sen. Pat Toomey, R-Penn., said of the Treasury's full sweep of profits from the GSEs that “it looks an awful lot like an unconstitutional taking.” Toomey voted against the bill.

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