Nearly nine months after the government seized Fannie Mae and Freddie Mac, lawmakers are poised to take their first steps this week toward determining the future of the government-sponsored enterprises.
But don't expect any rush to judgment.
The issues that first clouded a discussion of what happens next with the enterprises have only deepened since September of last year. The House Financial Services Committee capital markets subcommittee hearing on Wednesday is seen as the opening salvo in what is expected to be a long and contentious debate over whether to privative, nationalize or seek some third alternative for the mortgage giants.
"We are starting to see some good ideas float to the surface," said Rep. Paul Kanjorski, the panel's chairman, in an interview. Lawmakers want "to see what our choices are and then start prioritizing those choices for the future."
One complicating factor is how essential Fannie and Freddie have become to the government's efforts to stem the worst of the housing crisis. The Obama administration is using the GSEs to implement a critical portion of its foreclosure prevention plan and help fuel liquidity in the mortgage markets. It is unlikely to support any change in the GSEs' status until the financial crisis is over.
"Right now they are still being used as a necessary tool," Kanjorski said. "If we were to shut them down or to significantly change them where they had to go through a rebirth from ground zero, we wouldn't have them available as a tool."
Observers said they expect a long debate that will be next to impossible to conclude this year.
"We're at the start of the fight," said Jaret Seiberg, a policy analyst with Washington Research Group, a division of Concept Capital. "This is a massive undertaking that poses enormous risks to the economy if you get it wrong. It's going to take a considerable amount of ground work and that's what's starting this week."
Once the crisis passes, the future of the GSEs remains anyone's guess. While some conservatives favor privatizing the enterprises, others have called for regulating them like a national utility. Policymakers could also nationalize the GSEs they have already been nationalized on a temporary basis by being in conservatorship or return them to the quasi public-private status they enjoyed before their collapse.
Whatever the outcome, the debate is likely to be mired by partisan politics.
Many Republicans blame Fannie and Freddie for causing or exacerbating the crisis, and argue they must be slashed or eliminated altogether. They want the companies' future to be included in a broader bill to restructure the financial regulatory system.
In an interview, Rep. Scott Garrett, the top Republican on the subcommittee, said the GOP will argue for privatizing the GSEs.
"Instead of going into a conservatorship," the GSEs "should have gone into a receivership and then allowed for a phase-out over a period of time to allow for the privatization of the GSEs," he said. "The goal being to create that proverbial level playing field where you are not having the government with its backstop and guarantee on the leverage to unfairly compete with the rest of the marketplace."
Garrett said the goal should be to eliminate the government's role.
"You have problems when you do a half-measure, if you do it with a public-private mechanism, like we have for the GSEs, where you have stockholders on one hand and you have the public on the other side. You had conflicting roles," he said. "That is an untenable position for any corporation to try and define itself in."
But Democrats, who hold a solid majority in both chambers of Congress, have traditionally opposed any step toward privatization. They are expected to handle GSE issues separately from regulatory restructuring, and unlikely to favor the marginalization of Fannie and Freddie, which they view as essential in promoting affordable housing.
Kanjorski said his side of the aisle is still developing a position, but he said a return to the previous status quo was unlikely.
"Clearly there will have to be substantive changes made," he said. "There was somewhat of a catastrophic failure in the system that none of us adequately compensated for. In order to get everything started again on a firmer base, it seems to me we really have to come up with some new methodologies for handling them. There is a real wide range of possibilities."
The Pennsylvania Democrat said that could include privatization. "We should keep our minds open to everything," he said. "I have no predilections of what we should do. If Scott [Garrett} has some good ideas along those lines, I'm going to encourage him to make them. I hope he doesn't freeze in those ideas as I won't freeze in any of my ideas, then maybe we can find ourselves in a common bipartisan agreement on how to solve the problem."
But Kanjorski said privatization may not be "sufficient" to reassure investors that the problems at the GSEs are fixed and said policymakers must also consider giving the GSEs permanent government support.
"If the government is going to stand behind all of this 100% and we don't intend to disengage the government as a lender of final and last resort, well, then it could happen," he said. "If we do that, we should probably go in within an agency of government to be the final and last lender."
One item lawmakers will likely have to tackle is the reauthorization of a bill passed last year that gives the Treasury Department temporary authority to purchase GSE debt or other securities.
Kanjorksi said lawmakers will look at extending that power, which expires at yearend.
"We will have to reexamine over the summer and see if there are things that should be renewed or reauthorized because I don't want to cut us off from any possibilities from powers that exist now until we are all satisfied that the recovery is indeed at hand," he said. "We are really walking on very thin ice."
Whatever direction they move in, lawmakers are likely to tread carefully to ensure it does not disrupt the markets. "We shouldn't take sudden stops or turns," Kanjorski said.
He said he planned to listen to several academics scheduled to testify Wednesday about the best way forward. Among them is Larry White, a professor at Stern school at New York University, who argued in an interview that once the crisis is past, the companies should be privatized.
"All ties with the federal government ought to be severed," he said. "The things they do for the housing market ought to be replaced by explicit budgeted, targeted programs through" the Department of Housing and Urban Development and the Federal Housing Administration "to help first-time homebuyers."
Two former players likely to stay on the sidelines are the GSEs themselves. Fannie and Freddie were once powerhouses in Washington, but the Federal Housing Finance Agency has banned them from any lobbying activities while in conservatorship.
Some changes may even occur without Congress.
Karen Shaw Petrou, managing partner of Federal Financial Analytics, said that, though the final fate of Fannie and Freddie is likely to remain in limbo for some time, she would not rule out further government actions if the two GSEs continue to experience massive losses. "You could see FHFA taking some aggressive interim steps," she said.