WASHINGTON (AP) - The regulatory hammer hangs over Fannie Mae and Freddie Mac.
Legislation that would give the government more power over the two mortgage finance companies is shaping up as a key bargaining chip for Senate Democrats eager to obtain Republican support for a $300 billion housing rescue plan.
That plan, sponsored by Rep. Barney Frank, D-Mass, is on track for a vote in the House next week after passing a key committee Thursday.
A separate bill that gives a new regulator the authority to limit the multitrillion-dollar mortgage holdings of Fannie and Freddie passed the House last spring but the Senate has not acted.
Republicans warn the two companies, which only recently recovered from accounting scandals, are so large that their exposure to the current mortgage market turmoil poses risks to the entire financial system. Democrats, meanwhile, have pushed for an expanded role for Fannie and Freddie as a way to make credit more available and affordable to consumers.
Reforming oversight of Fannie and Freddie 'has gone from dead and buried to alive and breathing in the last week or so,' said Jaret Seiberg, a financial services policy analyst with Stanford Group. 'There's an increasing chance that it could get added to a massive housing stimulus bill as a way to generate Republican support for the overall measure.'
The impact for Fannie and Freddie, whose share prices have been cut in half over the past year as they reported combined 2007 losses of $5.2 billion, depends on how much power the government gets over their finances.
A requirement for the companies to hold an increased amount of capital to guard against losses or to limit the amount of mortgage investments on their books would be viewed as a negative on Wall Street.
For their part, Fannie and Freddie executives say they back a more powerful regulator but don't want lawmakers to go too far.
Richard Syron, Freddie's CEO, said in Senate testimony earlier this year that too-strict standards for capital to guard against losses would limit the company's ability to support the mortgage market. Daniel Mudd, Fannie's CEO, warned against 'arbitrary' limits on the mortgage securities the companies can hold on their books.
Meanwhile, falling home prices, growing foreclosures, a slumping economy -- and an upcoming presidential election -- have moved the housing issue to the top of lawmakers' to-do list.
'Both the Republicans and Democrats recognize that the public wants them to act,' said mortgage industry consultant Howard Glaser. 'That's prompted real negotiation and debate.'
While Democrats have the ability to advance their ideas in the House, their narrow majority in the Senate, combined with the threat of a filibuster, makes it especially important to seek Republican support.
Aides to Sen. Christopher Dodd., D-Conn., the chairman of the Senate Banking Committee and Sen. Richard Shelby, the committee's top Republican, were meeting this week to try to hammer out an agreement on the Fannie and Freddie legislation combined with Dodd's version of the housing rescue plan.
Dodd is hoping that the banking committee will approve both bills next Tuesday.
Some analysts are doubtful lawmakers will be able to compromise, given all the legislative crosscurrents being stirred up by lobbyists representing real estate agents, homebuilders, mortgage lenders and other interests.
'The more cars you try to tack onto the train, the harder it is to get out of the station,' said Bert Ely, an Alexandria, Va. banking industry consultant.
Fannie and Freddie were created by Congress to pump money into the home-mortgage market by buying home loans from banks and other lenders and bundling them into securities for sale on Wall Street. Together they hold or guarantee about $5.1 trillion in home-mortgage debt.
While the government isn't obligated to assist Fannie or Freddie in a financial emergency, many on Wall Street believe Washington would bail them out if there is a collapse.
Over the past year, Fannie and Freddie's share of new mortgages has been soaring, as Wall Street investors have backed away from all but the safest mortgage-related securities. Their share of new mortgage securities rose to more than 80 percent in the first quarter of 2008, up from less than 40 percent in 2006, according to trade publication Inside Mortgage Finance.
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