Mark Felsenthal and Margaret Chadbourn | Reuters
“Obama will propose eliminating mortgage finance entities Fannie Mae andFreddie Mac over time, replacing them with a system in which the private market buys home loans from lenders and repackages them as securities for investors, senior administration officials said. The mortgage securitization process is deemed essential to the smooth flow of capital to housing markets and the availability of credit.
The government’s role would be relegated to providing some form of insurance or guarantee, and to providing oversight, according to officials and a White House statement.
Fannie Mae and Freddie Mac, originally chartered by Congress to expand mortgage finance, were taken over by the government in 2008 amid mounting losses in the financial crisis. Propping them up cost taxpayers $187.5 billion, although the firms have now returned to profitability.
“We have to end Fannie and Freddie going forward and replace them with a commitment to the notion that private capital must be wiped out before the government pays on any form of catastrophic guarantee or reinsurance,” a senior administration official told reporters.
The departments of Treasury and Housing and Urban Development have been working on an outline for housing finance reform. They outlined several options in a white paper to Congress in 2011.
After plunges in home values that wiped out an estimated $7 trillion in homeowner equity and wrecked many Americans’ finances, housing markets are staging a modest recovery. Obama, as part of a series of speeches pushing for steps to boost tepid economic growth, is focusing on housing issues in a speech in Phoenix, Arizona, in one of the regions hardest hit by the housing bust.
The president generally agrees with the bipartisan Senate proposal that would replace Fannie and Freddie with a system that would allow private firms to securitize mortgages, a senior administration official told reporters in a conference call. A government reinsurer of mortgage securities could backstop private capital in a crisis, the official said.
Obama would want the Senate measure to go farther in helping first-time home buyers and in making sure affordable rental housing is available, the official added.
The Senate bill, though, remains at odds with the bill advancing in the Republican-controlled House of Representatives that would liquidate Fannie Mae and Freddie Mac over five years and limit government loan guarantees.
RESTRUCTURING MORTGAGE SYSTEM TO TAKE YEARS
Fannie Mae and Freddie Mac became dominant players in housing finance when private lending to home-buyers declined after the financial crisis. The government-backed companies own or guarantee more than half of all U.S. home loans and are critical to keeping capital flowing to lenders and borrowers.
Restructuring of the $11 trillion mortgage finance system is expected to take years. Any overhaul must also include a mechanism to maintain stability for the 30-year-fixed rate mortgage even in shaky financial markets, the official said.
Mortgage finance reform should also incorporate a fee on mortgage products to be paid by financial firms that would help fund for lower-income families buy homes, the official added.”