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) -- 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



Freddie Mac


- 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.

Of nine experts providing testimony on Wednesday, all but one were supportive of continued government guarantees on mortgage debt. Some said it was "inevitable," while others grudgingly acknowledged that the alternative will be too difficult to achieve. The private sector simply doesn't have the ability or risk tolerance to fund the entire mortgage market without a little help from Uncle Sam, they said.

For instance, Mike Heid, co-president of

Wells Fargo's

(WFC) - Get Wells Fargo & Company Report

home mortgage business, outlined a key industry proposal that would keep the core elements of the status quo in place.

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Under a plan formulated by the Financial Services Roundtable's Housing Policy Council, which Heid chairs, the "hybrid" model of Fannie and Freddie would remain in place. Though it has been almost universally criticized as inherently flawed, the restructured mortgage-finance entities - called mortgage securities insurance companies, or MSICs - would be privately owned but relying on public guarantees for profits. The Roundtable view represents those of large members, including Wells and other top mortgage servicers, like

Bank of America

(BAC) - Get Bank of America Corp Report


JPMorgan Chase

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U.S. Bancorp

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Heid took pains to note the nuances between the existing system and the new-fangled proposal - a new acronym, explicit guarantees on securities rather than implicit ones on the companies that own them and tougher, "world class" regulation rather than the subpar standards of yore. But, at its core, not a whole lot would change. Taxpayers would still be on the hook when the system goes belly-up. Private players would still profit from their largess in good times, when scars from the crisis will have faded.

Heid struck a tone similar to top U.S. Treasury Department officials. They have indicated a preference for a system with ongoing government support - explicit guarantees, but with higher fees and more taxpayer protection. They have also implied that the major flaws in housing finance have already been fixed.

"Lenders have already implemented stronger underwriting standards, and the current GSEs have tightened their standards and have put many more requirements on originators" and lenders, said Heid. He predicted that new requirements will make "abuses that occurred in the past unlikely to be repeated."

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Edward Pinto, a former Fannie Mae executive-turned-consultant who has worked in the industry for decades, was the only witness expressing skepticism of proposals that eerily like the status quo.

"Some have argued that federal intervention and guarantees are inevitable," said Pinto. "Beware of such advice."

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Pinto quoted top Obama administration officials who have said there will be dire consequences if the U.S. merely tweaks the legacy housing-finance system. He noted that many of the policy goals behind that system haven't even been achieved - low-income individuals have been burned by the subprime crisis, the homeownership rate has fallen, taxpayers have spent trillions of dollars trying to repair the system while Fannie and Freddie nearly collapsed.

"The failures caused by past interventions are evidence that such intervention does not work," said Pinto. "

Advocates will say - 'but this time will be different.' It will not."

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The discussion is just beginning on housing-finance reform, with the Obama administration set to produce a proposal by January. It will arguably be the biggest hurdle for both regulators and lawmakers to leapfrog in the financial reform proceedings, and and the most important one for taxpayers and homeowners. Hopefully, the outcome will be far removed from the status quo.

-- Written by Lauren Tara LaCapra in New York


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