Election Will Impact Housing Finance

WASHINGTON (TheStreet) -- One of the most important tasks before the 112th Congress will be rewriting the rules of the American dream.

Since Fannie Mae (FNMA) and Freddie Mac (FMCC) were seized by the federal government in September 2008, lawmakers, with a few exceptions, have remained surprisingly mum about what will become of them. The Obama administration has promised to deliver a plan for the future of housing finance a few times, but ultimately put it off until next year.

Restructuring Fannie and Freddie in any meaningful way would have been difficult enough when one party dominated Capitol Hill. Now, with polls predicting that Republicans will at least split the legislative branch -- if not take it over outright -- it may be completely impossible to restructure the government-sponsored entities.

"Will the pace of GSE reform speed up or slow down, depending upon the results of November 2?" asks HSH Associates, a mortgage-data firm, in a recent blog post. "Our guess is neither; even then, once they do, our suspicion is that only minor reforms will come, with substantial reform possibly kicked past the 2012 presidential election."

When asked what the mortgage industry wants out of Tuesday's election, HSH Vice President Keith Gumbinger offered a common refrain: Clarity.

Liberals tend to favor a system that keeps the government deeply involved in the mortgage market, with the goal of expanding homeownership for disadvantaged Americans. Conservatives want the government to exit mortgage-finance completely, leaving it all up to the market to decide.

The first option would keep mortgage credit flowing freely, and probably make it more available. But it would also retain the "moral hazard" element in which taxpayers are forced to foot the bill when things go bad. The second option would restrict credit, excessively for some parts of society, whether low-income families or minorities.

While taxpayers, economists and op-ed columnists can debate the pros and cons of either system endlessly, the mortgage market just wants to know the rules of the game: How can it make money, and how much?

"Before, money was made by Fannie, money was made by Freddie, money was made by banks, money was made by investors, money was made by brokers," says Gumbinger. "Now, people are just selling mortgages to Fannie and Freddie as quickly as they can before the rules change on them. They're saying [to the government], 'Until I know to what extent you're going to be in the game, I don't know if there's a game to play."