WASHINGTON – Private markets and not government sponsored enterprises Fannie Mae and Freddie Mac would be the primary source of mortgage credit going forward under the Obama Administration's plan to reform the housing finance system, announced this morning during a briefing at the Treasury Department.
The long-term plan would wind down the two troubled mortgage giants, target the government's assistance to low and moderate-income home owners and renters and leave the vast majority of the mortgage market to the private sector. Currently, more than half of all residential mortgage originated by credit unions are sold to Fannie Mae or Freddie Mac, with the proceeds of the sales used to finance additional mortgage lending.
The White House pledged to work with the Federal Housing Finance Agency, the prime regulator for Fannie and Freddie, to provide an orderly transition toward a reduced role for the two firms, pillars of the nation's housing finance system for more than seven decades which have wracked up nearly $180 billion of losses over the past three years.
In a 31-page report, the administration proposed that the two mortgage lending giants should be gradually abolished and it gave Congress three options for reducing the government’s role in supporting homeownership. Under one option, the government’s historically dominant role in insuring or guaranteeing mortgages would shrink substantially, and would be limited to support for creditworthy borrowers with low and moderate incomes. The other two options would preserve a role for the government as an insurer of mortgages — but only in times of financial turmoil, under one possibility.
In presenting the three options, the administration excluded the possibility of completely eliminating government support for the housing market — as some free-market conservative Republicans have proposed. But officials said the government’s role would almost certainly be reduced from what it was before the financial crisis began in 2008.
“We will not have a future Fannie or Freddie,” a senior administration official said in a briefing at the Treasury Department. “We will not have an option that is broad and deep across the market.”
"The GSE model is dead," an Obama administration official said at the briefing.
Currently, Fannie Mae, Freddie Mac or the Federal Housing Administration guarantee more than 90% of all new mortgages. The F.H.A. alone guarantees about 30 percent, compared with a historical norm of roughly 10% to 15%.
The first option would severely reduce the government’s role in insuring or guarantee mortgages, limiting it to programs targeted at creditworthy borrowers with low or moderate incomes. It would let capital flow from housing to other sectors of the economy, reduce systemic risk and minimize taxpayer exposure to potential losses. Under this option, mortgages for most Americans would be significantly more expensive.
The second option would provide a government backstop to ensure access to credit during a housing crisis. In normal times, the government would have a minimal presence in the mortgage market, but during times of financial stress, it would “scale up.”
The final option would offer explicit government insurance for securities backed by a targeted range of mortgages. Under this approach, a group of private mortgage guarantors “that meet stringent capital and oversight requirements” would guarantee securities backed by mortgages that meet strict underwriting standard.
A government “reinsurer” would then insure the holders of those securities, who would be paid out only if the shareholders of the private mortgage guarantors “have been entirely wiped out.” The government would charge a premium for such insurance; the money would be used to cover future claims and recoup losses. This final option would provide the least expensive access to mortgage credit of the three choices, though mortgage rates would probably still increase. But like the current system, that option might result in artificially high housing prices and expose the taxpayer to risks.
