Senate Majority Leader Harry Reid's surprise criticism of President Obama's plan to unwind Fannie Mae and Freddie Mac has upset the conventional wisdom surrounding housing finance reform.
In a little-noticed interview with Nevada's public radio station KNPR late last month, the Nevada Democrat objected to calls to eliminate the government-sponsored enterprises, suggesting that doing so could make it harder for people to buy homes.
"The president said just a few days ago we are going to have to take a look at Fannie and Freddie, these are the government organizations that have made home ownership so easy. I don't agree with the president," Reid said. "He says he wants to get rid of them. I think we'd better be very, very careful in doing that. I will look closely at his recommendations because on their face, I don't like them."
The comments raised doubts about how fast the Senate could move on a bipartisan housing finance reform bill that includes the dissolution of Fannie and Freddie. That plan has been publicly embraced by President Obama and was gaining momentum among Senate lawmakers.
"It felt like one of the strings of consensus in the GSE reform debate was the liquidation of GSEs as we know it, so this statement in and of itself causes us to reconsider whether that is truly a point of agreement on Capitol Hill," said Isaac Boltansky, a policy analyst at Compass Point Research & Trading, who drew attention to Reid's statements in a note to clients.
Obama laid out broad principles for GSE reform in a major housing address, calling a plan by Senators Bob Corker, R-Tenn., and Mark Warner, D-Va., "pretty consistent" with his own views.
The Corker-Warner bill, which has attracted bipartisan support from several members of the Senate Banking Committee, would replace the GSEs with a largely private market backed by a catastrophic government guarantee. Senate Banking Committee Chairman Tim Johnson, D-S.D., and Sen. Mike Crapo of Idaho, the top Republican on the panel, have indicated they will take up GSE reform when Congress returns from recess in September, and will likely borrow from the Corker-Warner bill and other proposals.
Reid said during his radio interview that he is open to making big changes at the GSEs, a position that may resonate with some Democrats who are uncomfortable with jettisoning Fannie Mae and Freddie Mac altogether.
"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.
A spokesman for the lawmaker did not respond to a request for further comment.
But whether there are other Democrats who will jump up to defend Reid's position remains to be seen. His remarks come as Sen. Jack Reed, who has long been rumored to be working on his own mortgage finance reform plan to potentially recapitalize the GSEs, now appears to be throwing his support behind the existing efforts underway on the banking panel.
"Senator Reed is very interested in finding a way to eliminate the GSEs and preserve mortgage financing for the middle class, but he believes the best way to achieve this goal is for Chairman Johnson and Ranking Member Crapo to continue working together and leading on this issue," said Chip Unruh, Reed's spokesman, in an e-mail to American Banker, a sister publication to BIC.
Reid's comments also illustrate some of the remaining difficulties for lawmakers as they work to advance housing finance reform this year. Even as key players show support for broad outlines of a shared plan, there are many stakeholders left on both sides of the political aisle who haven't yet weighed in.
Moreover, if lawmakers advance a bill through the committee and onto the floor of the Senate, they will still need to negotiate with the House. The House Financial Services Committee passed a plan, co-authored by chairman Jeb Hensarling, R-Tex., last month that would unwind Fannie and Freddie and provide no government guarantee in the housing market.
Reid's comments are also a reminder of how much influence the Senate majority leader will have on any housing finance reform package.
"The power the majority leader has in making that decision is something that any majority leader regardless of how close or how far apart from the president will always protect," Mills added. "As the majority leader, he has a tremendous amount of sway over this debate, and he hasn't really weighed in on it yet."
Some observers, meanwhile, remained more skeptical about the impact that Reid's comments will have on the larger debate. Taken in context, his move could represent more of an opportunity to differentiate himself from the White House than an attempt to stake out a strongly held policy position.
"It didn't cost Sen. Reid anything to pick an instance where he could distinguish himself from the president's position," said Boltansky, noting that the question about GSEs followed a long back-and-forth with the radio host in which Reid stood in support of Obama's health care legislation. "It didn't hurt him to choose something where he could disagree with the president without really impacting the debate more broadly."
Others noted that the broader discussion over housing finance reform is still developing and may continue to evolve for the foreseeable future.
"I still take it with a grain of salt," said Brian Gardner, an analyst at Keefe, Bruyette & Woods, of Reid's comments. "I don't see any lines in the sand here. I think this is an evolving debate and I don't see this as being telling that one outcome is more likely than another."
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