Obama Administration Spells Out Endgame for Fannie, Freddie

BY Murrey Jacobson  February 11, 2011 at 2:38 PM EDT

In a long-awaited report, the Obama Administration unveiled a series of proposals today calling for the eventual end of the troubled and often-criticized mortgage financing giants, Fannie Mae and Freddie Mac.

Treasury and housing officials proposed options for a new system that would still likely have the government provide some assistance and a backstop for the mortgage market, but with a substantially smaller role for the government focused on helping creditworthy lower and moderate-income Americans. One option would have the government only serve as a mortgage insurer during times of crisis. Another could lead to higher costs and more expensive mortgage rates along with other changes to the traditional 30-year fixed-rate mortgage.

While much of the plan had been floated in the media in recent days, perhaps most surprising was the Administration’s explicit tone in distinctly calling for an end to Fannie and Freddie. The two companies, long a target of Republicans, are now acknowledged by both parties — and most experts — to have taken on too many risky loans in the buildup of the housing bubble.

Treasury Secretary Tim Geithner made that case during a forum at the Brookings Institution this morning.

Administration officials said they decided to offer the broad outlines of plans which could be shaped in detail by Congress. But Geithner said he did not see a complete phase-out of Fannie and Freddie for at least five to seven years because of the pivotal role they have been playing in a weak mortgage financing market.

Reaction from Republicans and conservatives was generally more positive than in the past, but laced with some criticism or concerns that not enough details were provided.

Rep. Scott Garrett (R-NJ), who has often been critical of the Administration, told reporters that he was “encouraged to see the administration included a number of reform ideas that track closely with my own.”

Rep. Ed Royce (R-CA) told the NewsHour: “What I like about the proposal is in the past we had basically a government monopoly, government sponsored enterprises…We had created a monopoly there…I like the fact that we have private capital now coming back into the market under this plan, so that we don’t have the problems that we had with the monopoly.”

But Peter Wallison of the American Enterprise Institute wrote that “the administration could not bring itself to recognize the hazard to the taxpayers that is implicit in any government role in housing finance.”

Fannie and Freddie are known as government-sponsored enterprises (or GSEs) that were designed to help promote affordable housing. But as they grew during the housing bubble, they took on more risky mortgages with what was considered an implicit or explicit guarantee from the government should the mortgages default.

Since the financial crisis of 2008, they have become even more crucial to providing credit and liquidity to a battered housing market. Together they have a combined portfolio of more than $1.5 trillion in mortgages. Along with the Federal Housing Administration (FHA), they now either own, sell or more often guarantee nine out of 10 new mortgages.

After Fannie and Freddie got into deep financial troubles of their own, more than $130 billion of taxpayer support was provided to the two companies as the government took them into conservatorship.

In the “white paper” released today, Obama Administration officials wrote that the pair of GSEs “were allowed to behave like government-backed hedge funds, managing larger investment portfolios for the profit of their shareholders with the risk ultimately falling largely on taxpayers.”

To prevent that kind of sizable risk again, Geithner laid out three options for the long-term:

– Limiting the government’s role largely to insuring or guaranteeing mortgages for a more targeted group of lower or moderate-income Americans with decent credit. Private lenders and banks would resume a much bigger role for 85 percent of the housing market.

– A second option that’s similar in many ways, but that gives the government the flexibility and authority to insure or guarantee many more mortgages in times of crisis with a government backstop.

– Having the government provide mortgage reinsurance and pay out when there are major problems. Some compared it to the role that the FDIC plays. Mortgage servicers and lenders would pay a fee for the government insurance. First losses would be borne by the private sector, but the government would cover additional losses.

Geithner warned that none of those options could be done too quickly.

It would probably take “five to seven years to do it in three phases,” he said. “We have to see the process of repair in the housing market first.”

Shaun Donovan, the secretary of Housing and Urban Development, said the government was ready to take some more immediate steps on which there is already “a broad consensus.”

Those include:

– Increasing down payment requirements for some FHA mortgages

– Reducing the size of mortgages Fannie and Freddie can purchase from $729,000 to $625,000 this fall. (That’s supposed to occur automatically unless Congress authorizes otherwise.)

– Raising the fees Fannie and Freddie charge to lenders

– Shrinking the portfolios of both companies

– Increasing the price of FHA mortgage insurance

Geithner said he hoped to work with Congress on the proposals this year.