Obama Overhaul of Housing Finance Would Scuttle Fannie, Freddie

The Obama administration today sent to Congress proposals to reduce government support for the home finance market, a series of ambitious if sketchy and protracted moves that would wind down the federally backed mortgage giants Fannie Mae and Freddie Mac.

The 32-page plan outlines steps to make room for more private capital while reducing the role of Fannie and Freddie -- known as government-sponsored enterprises -- in the market for funding loans to prospective home buyers.

"This is a plan for fundamental reform -- to wind down the GSEs, strengthen consumer protection and preserve access to affordable housing for people who need it," Treasury Secretary Tim Geithner said.

Housing and Urban Development Secretary Shaun Donovan added that in the wake of the 2007-09 financial crisis, which was triggered by a housing meltdown, the plan aims to "fix the fundamental flaws in the mortgage market and better target the government's support for affordable home ownership and rental housing."

The plan would ultimately ratchet up the difficulty for Americans to obtain home loans with government help, but it aims to do so slowly at a time when the housing market has yet to recover from the crisis. Fannie and Freddie don't originate loans; they buy them. The plan wouldn't affect loans currently guaranteed by the two GSEs.

Fannie and Freddie, whose origins reach back to the Great Depression, were created to foster home ownership by buying mortgages from banks and packaging them into bonds -- essentially a channel for turning investors' cash into home loans.

They aren't owned by the federal government, but for decades they profited from widespread perceptions that Washington would guarantee all their transactions. That allowed Fannie and Freddie to access capital at costs practically as low as the government's own borrowing through Treasury bonds.

Republicans and some economists have long criticized that dynamic as an unfair advantage over rivals in the private sector. This disparagement only grew after the Bush administration in September 2008 orchestrated a move to put them under federal conservatorship as the housing market completely tanked.

Since then, under congressional authorization passed at the time, the Treasury has spent more than $130 billion to make sure Fannie and Freddie could honor their debts. In the wake of private capital's flight from the housing market following the financial crisis, the government has been guaranteeing nine of every 10 new home loans.

Republican reaction to today's announcement from the Obama administration was welcoming but cautious.

House Financial Services Committee Chairman Spencer Bachus noted that the administration's report incorporates a plan House Republicans offered two years ago to end what they labeled a "taxpayer bailout."

"For that I commend them," Bachus said. "However, what the administration offered today isn't a plan to move us forward, but rather a collection of options to consider."

Bachus added that Republicans planned to sit down with administration officials and try to find common ground.

"What we need is legislation that protects taxpayers from further losses and future bailouts and builds a stable housing finance system based on private capital," he said.

That is also one of the administration's stated goals.

The plan would:

• Try to bring private capital back to the housing market by phasing in an end to the "unfair capital advantages" enjoyed by Fannie and Freddie by "requiring them to price their guarantees as though they were held to the same capital standards as private banks or financial institutions." But it said "the pace of these increases will depend significantly on market conditions," and that the move will probably take place over several years.
• End a temporary increase in the size of the loans that Fannie and Freddie are allowed to guarantee to further reduce their presence in the housing market.
• Phase in an increase in required down payments for borrowers to 10 percent of the cost of their homes. This is aimed at helping to protect taxpayers from potential defaults.
• Wind down the size of Fannie and Freddie's investment portfolios at an annual rate of at least 10 percent per year.

The administration would also adopt congressional Republicans' goal of minimizing the role of the Federal Housing Administration, which doesn't make loans but provides lenders with insurance against defaults.

Congress gave the FHA a hugely expanded role following the crisis, and the administration plan recommends that this role be allowed to expire as scheduled in October. The White House also said Obama's 2012 budget -- due to be announced next week -- would increase the cost of FHA insurance premiums by a quarter of a percentage point.