Politics clouds proposed overhaul of U.S. housing finance system

By Margaret Chadbourn WASHINGTON (Reuters) - The Senate Banking Committee appears likely to back a bill to wind down government-backed mortgage giants Fannie Mae and Freddie Mac, according to sources familiar with talks on the legislation. The committee's leaders have secured a bare majority of the votes needed to push the bill forward, but Senate Majority Leader Harry Reid is not keen for it to come up for a vote on the Senate floor ahead of congressional elections in November, these industry and Capitol Hill sources say. Congressional aides say the panel's Democratic chairman, Senator Tim Johnson, and its top Republican, Senator Mike Crapo, want at least 16 "yes" votes on the 22-member committee before going to Reid, a Democrat who has voiced opposition in the past to measures that would get rid of Fannie and Freddie. They have 12 votes so far. "If you want to end the government's monopoly in the housing finance system, which is what both Republicans and Democrats want to do - the environment to get it done is ripe. But there is a limited amount of time to move," said Francis Creighton, the chief lobbyist for the Financial Services Roundtable, which represents the largest U.S. financial firms. Fannie Mae and Freddie Mac, which own or guarantee 60 percent of all U.S. home loans, buy mortgages from lenders and turn them into mortgage-backed securities, which they sell to investors with a guarantee. Never popular with Republicans, the mortgage giants became anathema when they were bailed out by taxpayers and taken over by the government during the financial crisis in 2008. The companies absorbed $187.5 billion in taxpayer funds before posting record profits. They have now paid $202.9 billion in dividends to the U.S. Treasury for the support they received, but lawmakers and the Obama administration want to remake the U.S. housing finance system to limit the chances of the government having to ride to the rescue again in the future. Under a bill drafted by Johnson and Crapo, the companies would be replaced with a system in which mortgages are mostly backed by private capital. The government would step in only after private interests had shouldered large losses. ROUNDING UP THE VOTES Johnson and Crapo have been massaging their draft to try to strengthen their hand ahead of a committee meeting on the legislation on Tuesday. They have the support of 10 others - five from each party - on the committee, according to sources who requested anonymity given the private nature of the ongoing talks. Four Democrats are considered undecided - Charles Schumer of New York, Robert Menendez of New Jersey, Jack Reed of Rhode Island and Jeff Merkley of Oregon. And two of the Senate's most liberal Democrats, Elizabeth Warren of Massachusetts and Sherrod Brown of Ohio, have said they will not vote yes without new measures that guarantee affordable loans and more low-income rental housing. But Johnson and Crapo risk losing Republican votes if they move too far. "Ultimately, the outcome of the effort in the Senate is likely to be determined by how much leadership has to give to the uncommitted Democrats to curry their favor and whether those stipulations will erode the conservative support," said Isaac Boltansky, a policy analyst at Compass Point Research. Civil rights and consumer groups are rallying in opposition to the bill, which they say would price out of the market some people who lack wealth but who would nonetheless be good borrowers. There are business opponents as well. Smaller financial institutions are trying to coax Johnson and Crapo to amend the draft to prevent the biggest banks from dominating the mortgage market once Fannie Mae and Freddie Mac are dismantled. Some hedge funds and other groups who bought stock in the two companies at discounts over the last few years also are attempting to derail the bill, worried they would lose a payout if the mortgage companies are restructured. White House officials who helped Johnson and Crapo craft the bill have organized a flurry of meetings with industry groups in recent weeks to discuss how to best put more pressure on President Barack Obama's Democrats, sources said. The Financial Services Roundtable and the Mortgage Bankers Association are among industry groups that have come together to launch newspaper ads urging lawmakers to vote for the bill. "Some want you to believe that progress is not possible. We strongly disagree," an advertisement sponsored by the groups says. "It's time to stop kicking the can down the road on mortgage finance reform." (Reporting by Margaret Chadbourn; Editing by Tim Ahmann and Paul Simao)