Obama's Promise of GSE Reform Still Years Away

NEW YORK ( TheStreet) -- President Obama's call on Tuesday to wind down government-sponsored enterprises Fannie Mae ( FNMA) and Freddie Mac ( FMCC) after a long period of silence is a sign that the White House is ready to wade into the debate on the government's role in housing and the future of housing finance.

It also served as another reminder of the broad support in Washington to wind down the agencies even though some in the investor community are betting against the odds the GSEs will return to private hands again.

The president's vision for the future of housing finance broadly echoed the bipartisan Corker-Warner Senate proposal that supports the idea of a government guarantee but puts private capital at the first-loss position.

Sen. Bob Corker (R-Tenn) said he was encouraged by the president's remarks. "There is real momentum growing to finally move a structural housing finance reform bill that ends the Fannie and Freddie model of private gains and public losses, and I look forward to working with my colleagues in the Senate, the House and the White House to see it through," Corker told the Southern Middle Tennessee Association of Realtors at a meeting in Columbia, Tenn.

Don't get too excited, Senator. By the time Congress is finished with your bill, it will look very little like the original.

Many have interpreted Obama's implied support of the bipartisan bill as another sign that the PATH Act, advanced by the House Financial Services Committee, is dead on arrival.

The PATH plan envisages a purely private market absent of any government guarantee, something that, predictably, is stiffly opposed by Democrats. But it has also met some resistance from some conservatives who worry about the impact the overhaul would have on the availability of mortgage credit.

Still, the idea of a government guarantee will be contested by some conservatives.

"A proposal that maintains implied or express government backing will only repeat the same cycle of market distortion, artificially low mortgage interest rates, over-investment and eventually collapse," James Valvo, director of Americans for Prosperity, said in a statement, urging the president to reject the "failed approach."

Even if there is eventually some consensus toward having some form of government guarantee, there are going to be plenty of add-ons.

President Obama is likely to embrace Corker-Warner, but will "add provisions to ensure access to credit for first-time homebuyers and support for rental housing for low and moderate income individuals," according to FBR Capital analyst Edward Mills.

Expect consumer advocates and housing lobbyists to pile on with various other provisions to ensure that homebuyers get easy access to credit, and then wait for each of those recommendations to pass through Congress.

Let's not forget also that while everyone may want to shut down the GSEs, Congress is going to be extremely slow and cautious in doing so. After all, we are talking about dramatically overhauling a $10 trillion market that has been functioning for decades.

It is why Tim Rood, partner and managing director at Collingwood, argued that a system where the agencies are overhauled but not replaced might make more sense.

The idea of "hand grenading them and recreating something just like them" just does not make sense, according to Rood. He said he believes that the GSEs can ensure that private capital bears the first hit on losses by simply changing their contract agreements with the seller or servicer. Similarly, more private capital can also be attracted by simply raising the g-fees higher.

"There are benefits to winding them down but they can't be done in a vacuum," he said.

Rood believes that given the repercussions, the reforms process is likely to stall. "I love the energy and enthusiasm around housing reform," he said. "But being in Washington I know that legislation gets passed only when one of two things happen: 1) when there is a crisis and everyone rallies around and does something for the greater good, and 2) when everyone is darn tired of talking about it. They have just begun talking about it."

KBW analyst Brian Gardner expressed a similar view. "We do not view the President's comments as a game changer in terms of the timing of GSE legislation," he said in a report Tuesday. "We continue to believe that such a bill will not be concluded until at least 2015 but we acknowledge that prospects for passing a final GSE bill by year end 2014 have improved slightly."

-- Written by Shanthi Bharatwaj in New York.
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