Four Reasons Why GSE Reform Unlikely This Year

WASHINGTON — Efforts to overhaul the mortgage finance system are gaining momentum, but key logistical hurdles remain as lawmakers prepare to return from the August recess.

Despite tangible progress in recent months, legislation is hardly poised for final passage. The Senate Banking Committee has agreed to turn to the issue this fall, while some House Republicans are pushing for a floor vote on competing legislation.

Still, major substantive disagreements, including over the existence and design of a government guarantee for the mortgage finance market, remain unsettled and have the potential to sideline discussions down the road.

Beyond those substantive roadblocks, lawmakers are also facing a time crunch that could make it harder to pass legislation in the near term due to immediate pressures like the upcoming budget fight, followed by the distractions that come with another round of campaigning and elections in 2014.

"Lawmakers want to get something done, but how quickly that develops given the business of politics is the key question," said Jason Ware, an analyst at Albion Financial Group. "It's likely to be more of a marathon than a sprint — they may be squeezed on more important issues in short run, like funding the government this fall. Immediately after, many will turn their attention toward the fight for political survival in 2014."

Below we outline four likely hurdles that could slow the pace of housing reform over the coming year:

Another Budget Fight
Lawmakers will face several fiscal fires almost immediately after they return from the five-week summer break next month. Congress will have just three weeks until a government shutdown on Oct. 1, unless the House and Senate can reach an agreement for funding the federal agencies for fiscal year 2014, including making a decision about whether or not to extend sequestration — the across-the-board budget cuts that went into effect in the spring. Soon after, lawmakers will again have to grapple with whether or not to raise the $16.7 trillion debt ceiling or risk the U.S. defaulting on its debts.

These fights, which have historically proven quite intense, are expected to be the main focus in Washington through the fall and perhaps into the winter.

"There's a limited amount of Congressional bandwidth and it's most likely to be focused almost entirely on the upcoming fiscal fights in the fall," said Isaac Boltansky, a policy analyst at Compass Point Research & Trading. "Pretty soon the goals will be reset, so that Congress will pat itself on the back for just avoiding the debt ceiling and a government shutdown, rather than advancing major legislation before the end of the year."

Still, committee level work may proceed as the budget battles play out, giving the Senate Banking Committee a chance to hold additional hearings and even produce legislation to reform the government-sponsored enterprises. But getting a bill to the floor in either chamber could prove difficult in the midst of fiscal negotiations, which could delay the chances of moving toward a legislative conference that many have predicted will be necessary to resolve differences in the House and Senate approaches to reform.

Moreover, an ugly showdown over the country's fiscal problems could sharpen the political divide, threatening chances for bipartisan cooperation on issues like mortgage finance reform.

"A protracted budget fight could poison the well for any other deal getting done," said Edward Mills, a policy analyst at FBR Capital Markets.

Fed Confirmations
President Obama is expected to name a nominee to succeed Federal Reserve Board Chairman Ben Bernanke this fall — a major announcement that could sidetrack the Senate Banking Committee from its work overhauling Fannie Mae and Freddie Mac.

"Given that there seems to be a very high certainty that it's going to be a new Fed chairman and it's not just a reconfirmation, I suspect that the committee is going to spend a fair amount of time vetting the candidate," said Brian Gardner, a policy analyst with Keefe, Bruyette & Woods.

Lawmakers on the Senate Banking Committee will likely hold informal meetings with whomever the president nominates, and then will need to schedule a confirmation hearing and subsequent vote before the nomination moves to the Senate floor.

To be sure, the process isn't one that's likely to distract the committee from other work for long stretches of time. But it's a top item on the agenda, particularly if Obama opts for a controversial choice that requires extra vetting. That will be particularly true if Obama nominates Harvard economist Lawrence Summers for the job. Summers is a divisive policymaker who is already facing opposition from lawmakers in both parties.

"Summers would draw fire from both sides," Gardner said. "If it is Summers I imagine the confirmation hearing and the debate on the floor to at least be more contentious."

Meanwhile, two Fed governors are also expected to depart soon, and replacements will need to be confirmed. Elizabeth Duke is set to retire at the end of the month and Sarah Bloom Raskin has been nominated for a top job at the Treasury Department, which will require confirmation by the Senate Finance Committee and the full Senate.

Immigration Reform
Obama and many lawmakers are also continuing to push for an overhaul of the immigration system, and while the prospects for a deal aren't high after the House failed to pass comprehensive legislation earlier this year, it's still possible the issue could take on new prominence.

The president even tied the issue to housing during a major address earlier this month, arguing that fixing immigration is critical for helping the mortgage market.

"It's pretty simple: When more people buy homes and play by the rules, home values go up for everybody," Obama said. "And according to one recent study, the average homeowner has already seen the value of their home boosted by thousands of dollars just because of immigration. So I want you to encourage Republicans in the House of Representatives to stop dragging their feet. Let's go ahead and get this done." If reform efforts were to gain new momentum, it casts even more doubt on lawmakers' ability to complete GSE reform in the near term.

"If they think they can get immigration done maybe that takes over," said Mills. "There's a finite ability to do all that many things. At a certain point you have to be realistic in considering how much this Congress can get done."

Moreover, Majority Leader Harry Reid, a key player in the drive for comprehensive immigration reform in the Senate, recently raised some doubts about current plans to unwind the GSEs. The Nevada Democrat defended Fannie and Freddie on a local public radio program earlier this month, saying he disagreed with Obama about the need to get rid of the GSEs.

"I have no problem looking at them, revising, revamping, but I think getting rid of them is not a great thing to do," Reid said.

It's not yet clear how hard Reid would push back against any plan to unwind the GSEs, but the candid discussion does raise concerns about whether the majority leader will make the issue a priority in coming months, particularly as he grapples with the budget, immigration and other issues.

"I think the biggest obstacle of getting GSE reform out of the Senate is Harry Reid," said Mark Calabria, director of financial regulation studies at the Cato Institute. "There really is no political upside for him doing GSE reform — there's very little to be gained from him spending time on it."

Midterm elections
The backstop for work on GSE reform and all of the other pressing issues in Congress remains the midterm elections next fall. The closer the elections loom, the less likely a major deal is to go through, particularly one that requires significant political compromise. That's particularly true given the possibility that Republicans could take control of the Senate, further elevating the significance of the upcoming elections.

"In all honesty, we've got 11 months to get meaningful movement on GSE reform before the sirens of the 2014 election overtake everything in D.C.," said Boltansky.

As such, it's possible the elections could push the major thrust of negotiations over housing finance reform into 2015.

"It may mean that most constructive elements of true reform may not actually happen until after the midterms, barring some real success in the dialogue between those with differing views," said David Stevens, president and chief executive of the Mortgage Bankers Association.

Beyond that timeframe, it gets exceedingly difficult to game out legislative efforts, but analysts have also noted that after the midterm elections, the focus in Washington will turn pretty quickly to the 2016 presidential elections — with some predicting that 2017 is a more realistic timetable for passage of GSE reform.

Put another way: if you have kids starting college in a few weeks, they may be on the verge of graduating before housing finance reform is actually signed into law. Whether Congress can prove the pessimists wrong and spur real action sooner remains to be seen.