Wall Street Whispers: A GSE by Any Other Name

WASHINGTON (TheStreet) -- Despite rhetoric on Capitol Hill regarding housing-finance reform, there's little chance Congress will implement the kind of sweeping change needed to "change the status quo," as one leading Democrat put it on Wednesday.

At a House Financial Services Committee hearing, Rep. Paul Kanjorski (D., Pa.) said lawmakers must work to minimize taxpayer losses, learn from past mistakes and hold ne'er-do-wells accountable. But Kanjorski, who heads a subcommittee on government-supported enterprises (GSEs), also added a footnote directed at Republican counterparts.

"Regardless of one's views, we can all agree that we must do something to change the status quo," said Kanjorski. But, he added, "we cannot replace something with nothing, as several of my colleagues on the other side of the aisle have proposed."

Kanjorski's words define the battle ahead of Congress, though his characterization is slightly skewed.

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Republicans don't necessarily want to replace the system with "nothing," though many would like to limit the U.S. government's role in mortgage-finance to a regulatory capacity. Currently, the government is the tail wagging the dog of the private mortgage market - through both regulation and taxpayer funds.

The U.S. now owns or guarantees $5.5 trillion worth of mortgage debt via Fannie Mae (FNMA.OB) and Freddie Mac (FMCC.OB) - roughly 70% of the mortgage-backed securities market. Those two GSE giants cost taxpayers nearly $300 billion last fiscal year, and government estimates total losses will climb to $400 billion when all is said and done.

That's a big, explicit hit for a system whose federal guarantees were merely "implied."

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Republican lawmakers came up with a plan during financial-reform proceedings to wind down Fannie and Freddie's portfolios over a period of 10 years. Over time, the mortgage market would gradually move to an entirely privatized system.

There's little chance such a plan could ever be politically viable, since it would make voters miserable.

Ken Bentsen, a representative of securities trade group SIFMA, said that without government support credit would be less available, housing markets would be more volatile and mortgage rates would be much higher.

"Secondary mortgage markets will continue to function regardless of what policymakers decide as 'there is a price for everything,'" Bentsen said in prepared testimony. "The price, however, is not always desirable to everyone."

Everyone seems to agree that the current system needs reform. Yet changes suggested by most regulatory, political and private-industry leaders are incremental at best - nominal at worst.