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Administration to Propose Plans to Shrink Fannie's & Freddie's Role

Source: LA Times

Posted on 10 Feb 2011

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Congress will be receiving from the Obama administration three blueprints to reduce or eliminate the government's role in guaranteeing mortgages and providing funding for home loans. Expected to be released Friday,  the proposal would shrink the role of mortgage-financing giants Fannie Mae and Freddie Mac, one-time government-sponsored enterprises designed to foster the market for affordable housing.

The administration's effort comes as federal officials and lawmakers grapple with how to extricate the government from its $150-billion bailout of the two entities while not damaging the fragile real estate market.

Many Republicans want to shut down Fannie and Freddie and have private companies replace them without the backstop of a government guarantee. The administration will propose that as one of three options.

But the other options would retain a scaled-back government role in housing finance.

Fannie and Freddie own or guarantee more than half of all U.S. mortgages and have become crucial to keeping capital flowing to lenders and borrowers. A broad restructuring of the $11-trillion mortgage system is expected to take years.

Under the financial regulatory overhaul enacted in July, the administration was required to submit to lawmakers by the end of January a plan for ending taxpayer support for Fannie and Freddie.

The government took control of the companies in September 2008 as losses linked to subprime mortgages mounted. Taxpayers now own 80% of each operation.

The administration's report will offer options that don't require legislation. Instead, the report is designed to present a path for luring private capital back into the housing finance market and reducing government's role in insuring mortgage-backed bonds.

Ideas for coaxing private capital into the system may include increasing the insurance premiums charged by Fannie and Freddie and forcing them to shed loans in their combined portfolios of nearly $1.5 trillion.

The administration also may suggest reducing the size of loans that the government-sponsored enterprises could insure. During the financial crisis, Congress temporarily raised the limits to as much as $729,750 in high-cost areas such as Southern California. The limit will drop to $625,500 on Oct. 1 if Congress doesn't act.

One option would phase out the government's guarantee of mortgage-backed securities until it is left as an insurer of last resort.

Federal Reserve Chairman Ben S. Bernanke on Wednesday said the government should put taxpayers at risk only after other protections have been exhausted.

"If the government is involved in providing credit guarantees, it should do so only as a deep backstop," Bernanke told the House Budget Committee. "The first losses should be borne by the originators of the mortgages or by the securitizers."

Many Republicans and conservative groups have proposed completely phasing out government involvement in the mortgage market. But housing advocates said they were wary of any plan that would raise borrowing costs without preserving government funding for affordable housing.