More than two years after the government seized Fannie Mae and Freddie Mac, the Obama administration will recommend phasing out the housing-finance giants and gradually reducing the government's footprint in the mortgage market, people familiar with the matter said, according to an article today at wsj.com by Nick Timiraos.
"The administration is expected to include three options for a post-Fannie and Freddie world when it releases a long-awaited proposal for the future of the nation's $10.6 trillion mortgage market, which could come as soon as Friday," the article said, adding that "together with federal agencies, Fannie and Freddie have accounted for nine of 10 new loan originations in the past year."
"Steps to reduce the government role in the mortgage market likely would raise borrowing costs for home buyers, adding pressure on the still-fragile U.S. housing markets. Consequently, analysts believe any transition could take years and would be driven by the pace of the housing market's recovery," the article continued, adding that "the White House's 'white paper' will begin what promises to be a prolonged and fiery debate about the future of how homes are financed across the U.S."
"The administration's proposal to Congress," the article said, "is likely to assess the merits and drawbacks of each of the three options. The most conservative would propose no government role in the mortgage market beyond existing federal agencies, such as the Federal Housing Administration. The two others would create a way for the government to backstop part of the secondary mortgage market, a role long filled by Fannie and Freddie. Under one, that government backstop would kick in primarily during periods of market stress; under the other, the government would play a role at all times."
"As the recent housing bubble inflated, Fannie and Freddie joined private lenders in loosening standards. Mounting defaults wiped out the pair's razor-thin capital reserves, spurring the government to take over both. The White House has committed unlimited amounts of aid to ensure that the firms meet their obligations to debt and securities holders. So far, taxpayers are on the hook for $134 billion. Treasury Secretary Timothy Geithner told PBS's Charlie Rose earlier this month that the housing-finance business was a 'mess' and that the administration's plan would 'crowd private capital' back in. That, he said, would curb the government role and leave 'a system that will not be vulnerable to the really tragic colossal failures' of the past, the article said.
"The administration's paper," the article continued, "will focus on three levers to help withdraw the government from the mortgage market, each of which promises to raise costs for borrowers. Officials are likely to call for lower maximum loan limits for mortgages Fannie and Freddie can purchase. Limits are set at $417,000 nationally but Congress approved emergency measures two years ago raising the limits to as much as $729,750 in high-cost areas. Unless Congress passes a third extension, they will fall to $625,500 in October."
"Policy makers," it added, "could also encourage Fannie and Freddie to steadily raise fees they charge banks to guarantee mortgages. As the fees rise, loans offered by private lenders that aren't government-backed will become more competitive. And they could push for gradual increases in the minimum down payments on government-backed loans.
While Fannie and Freddie are already on track to reduce their combined $1.5 trillion mortgage portfolios by 10% annually, the paper could also recommend accelerating that run-off if market conditions can support it."
Housing and Treasury aides met yesterday with President Barack Obama to review their report.
"The administration is expected to include three options for a post-Fannie and Freddie world when it releases a long-awaited proposal for the future of the nation's $10.6 trillion mortgage market, which could come as soon as Friday," the article said, adding that "together with federal agencies, Fannie and Freddie have accounted for nine of 10 new loan originations in the past year."
"Steps to reduce the government role in the mortgage market likely would raise borrowing costs for home buyers, adding pressure on the still-fragile U.S. housing markets. Consequently, analysts believe any transition could take years and would be driven by the pace of the housing market's recovery," the article continued, adding that "the White House's 'white paper' will begin what promises to be a prolonged and fiery debate about the future of how homes are financed across the U.S."
"The administration's proposal to Congress," the article said, "is likely to assess the merits and drawbacks of each of the three options. The most conservative would propose no government role in the mortgage market beyond existing federal agencies, such as the Federal Housing Administration. The two others would create a way for the government to backstop part of the secondary mortgage market, a role long filled by Fannie and Freddie. Under one, that government backstop would kick in primarily during periods of market stress; under the other, the government would play a role at all times."
"As the recent housing bubble inflated, Fannie and Freddie joined private lenders in loosening standards. Mounting defaults wiped out the pair's razor-thin capital reserves, spurring the government to take over both. The White House has committed unlimited amounts of aid to ensure that the firms meet their obligations to debt and securities holders. So far, taxpayers are on the hook for $134 billion. Treasury Secretary Timothy Geithner told PBS's Charlie Rose earlier this month that the housing-finance business was a 'mess' and that the administration's plan would 'crowd private capital' back in. That, he said, would curb the government role and leave 'a system that will not be vulnerable to the really tragic colossal failures' of the past, the article said.
"The administration's paper," the article continued, "will focus on three levers to help withdraw the government from the mortgage market, each of which promises to raise costs for borrowers. Officials are likely to call for lower maximum loan limits for mortgages Fannie and Freddie can purchase. Limits are set at $417,000 nationally but Congress approved emergency measures two years ago raising the limits to as much as $729,750 in high-cost areas. Unless Congress passes a third extension, they will fall to $625,500 in October."
"Policy makers," it added, "could also encourage Fannie and Freddie to steadily raise fees they charge banks to guarantee mortgages. As the fees rise, loans offered by private lenders that aren't government-backed will become more competitive. And they could push for gradual increases in the minimum down payments on government-backed loans.
While Fannie and Freddie are already on track to reduce their combined $1.5 trillion mortgage portfolios by 10% annually, the paper could also recommend accelerating that run-off if market conditions can support it."
Housing and Treasury aides met yesterday with President Barack Obama to review their report.
Architecture Critic
Carter Horsley
Since 1997, Carter B. Horsley has been the editorial director of CityRealty. He began his journalistic career at The New York Times in 1961 where he spent 26 years as a reporter specializing in real estate & architectural news. In 1987, he became the architecture critic and real estate editor of The New York Post.
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