In a little more than a week, Senate Banking is scheduled to mark up whatever version of the Johnson-Crapo housing-finance reform bill is put before it. So far, not so good. Each side is retreating to its corner, focusing on tried-and-true political message points even as key operational issues in the bill remain unresolved. Which is which and what next?

First, to the politics. As editorials this week in the Wall Street Journal make clear, this bill isn’t going down well with conservative Republicans, with advocacy groups already running ads calling this reform package a new version of Obamacare.

On the other side, a coalition of civil-rights groups is demanding that the bill do far more for affordable housing. These calls from the Democratic base are so loud that HUD Secretary Donovan this week tried his best to persuade them to take the most he thought they could get in the name of a public-private mortgage securitization structure the White House broadly supports – faint praise from the Administration, but so it goes when so key a constituency is revved up.

The politics of GSE reform grew even more fractious this week when community banks and credit unions weighed in. Linking GSE reform to the anti-TBTF jihad, these groups are pushing for sanctions – indeed fees – from big banks to pay for a new small-bank securitization utility. Doubtless inspired by new FDIC premiums in which big banks subsidize small ones, this scheme might play well in the Senate, but it will face formidable obstacles in the House. Not that anyone there loves big banks any better than in the Senate, but the new small-bank facility will raise even greater fears of a GSE redux among those pushing for flat-out privatization.  

Can both sides meet in the middle finally to decide the best way out of the GSEs’ conservatorship limbo? Can this Congress craft a foreign or fiscal policy? Okay, that’s a rhetorical question, but it goes to the heart of the matter. It’s hard to see the Senate, let alone the Congress as a whole, putting aside issues that resonate so loudly with voter bases to handle complex problems like the future of Fannie Mae and Freddie Mac.

Too bad, since the need to do so is compelling on two counts. First, the longer the GSEs languish in conservatorship, the less the need for mortgage finance to reform itself and finally reckon with a limited, targeted federal role. For decades, capital markets have grown so used to agency debt and MBS that central banks around the world treat Fannie and Freddie obligations as the equivalent of U.S. Treasury securities that have a handy little yield-kicker. The reason for the added yield was supposed to be added risk, but the 2008 rescue showed markets that the GSEs are as good as USG obligations. With this added reassurance, the TBA market continues as before, agency paper gets all sorts of advantages, and the incentives for meaningful reform are muted even as the need for it grows because of the hollowing out that continues at both of the GSEs.

If the GSEs are left as is, the taxpayer backstop for mortgages grows bigger despite all the “wind-down” plans. That might seem comfy, but here’s the disquieting second point: the GSEs are totally unstable as is.

The more we count on the GSEs to do the housing market’s bidding, the more fragile grows the national economy. The reason for this is partly the nature of the GSEs’ conservatorship. They now must send every dollar they make back to the Treasury. Thus, they have no capital cushion and, under stress, they are naked to the storm even as Treasury can no longer provide them with additional guarantees and orderly resolution for them preventing systemic risk is, at best, a crap shoot.

Fannie and Freddie did send billions back to Papa from their 2013 earnings, but the money bags were largely filled through one-off events like accounting adjustments. Stripped to long-term earnings from their basic guarantee businesses, Fannie and Freddie make respectable, but very limited returns. As government-owned guarantee and securitization utilities, this might be acceptable; as long-term strategy, not so much.