The White House will propose a path to wind down and eventually eliminate Fannie Mae and Freddie Mac and specify a range of options to replace the mortgage companies that have played a central role in the housing market for decades, according to people familiar with the matter.
The Obama administration is due to release its proposal for the future of the nation’s $10.6 trillion mortgage market as soon as Friday, outlining steps to gradually reduce the government footprint in the mortgage market. Together with federal agencies, Fannie and Freddie have accounted for nine of 10 new loan originations in the past year.
The administration is likely to outline five proposals, assessing the merits and drawbacks of each. But it will focus most attention on three of them, with the most conservative recommending the government play no role in the mortgage market beyond existing federal agencies.
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.
Steps to reduce the federal role would likely increase home buyers’ borrowing costs, adding pressure to still-fragile housing markets. Consequently, analysts believe any transition could take years and would be increasingly driven by the pace of the housing market’s recovery.
For the past 40 years, the housing-finance system has featured a blend of public and private players. Fannie and Freddie buy mortgages from banks and other originators, repackage them for sale to investors as securities and make investors whole when borrowers default. Investors long assumed the two shareholder-owned firms had an implied government guarantee, which enabled them to borrow at below-market rates and facilitate 30-year fixed-rate loans.
As the recent housing bubble inflated, Fannie and Freddie followed private lenders in loosening their standards. Mounting defaults wiped out the pair’s capital reserves, spurring Washington first to bail out and then take over both. 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 reduce government’s role and “leave us with a system that will not be vulnerable to the really tragic colossal failures” of the past.
The administration paper will focus on three levers to help wean the government from the mortgage market. Officials are likely to call for lower maximum loan limits for mortgages Fannie and Freddie can purchase. Limits are set as high as $417,000 nationally but rise to as much as $729,750 in high-cost areas. Unless Congress intervenes, they will fall to $625,500 in October.
Policy makers could also encourage Fannie and Freddie to steadily raise fees they charge banks to guarantee mortgages. As those rise, loans offered by private lenders that aren’t government-backed would become more attractive. And they could push for increases over time in the minimum down payments on government-backed loans.
The fight over how to restructure the housing-finance system has been intense, and offering multiple proposals ultimately could help the administration frame the coming debate.
While conservatives have called for the government to wind down Fannie and Freddie and hand their role to the private sector, Republicans may face their own divisions over whether to embrace a fully private market. Democrats have said a federal role is needed to ensure access to homeownership.
“If you focus on the steps everybody agrees on — here are the 10 things you’ve got to do — that gives people a chance to unite behind a set of steps to bring greater stability to the market while reducing the government’s role,” said Michael Barr, a former assistant Treasury secretary.
Housing and Treasury aides met Tuesday with President Barack Obama to review their report. Top administration officials have publicly discussed the merits of a limited but explicit federal guarantee of securities backed by certain types of mortgages. The housing and banking industries have advanced proposals arguing that such a guarantee is needed to maintain a healthy market, particularly for long-term, fixed-rate loans that remain a keystone of U.S. housing.
Others argue that because investors might assume the government will step in during a crisis, it is better to make guarantees explicit and then charge up-front fees for them.
But some economists and regulators have said any new government backstop would put too much risk on taxpayers. In exchange for guaranteeing loans, policy makers could face pressure to under-price guarantees.