The Obama administration on Friday declared that the public-private housing finance model in place for the past four decades was dead but pledged to continue backing exisiting obligations of Fannie Mae and Freddie Mac.
“The GSE model is dead,” a White House official told reporters, referring to the government-sponsored enterprises Freddie and Fannie, as the United States Treasury Department released a long-awaited report on options to revamp housing reform.
With real estate markets fragile and 2012 elections ahead, political consensus on an overhaul that would raise mortgage costs is likely to be elusive, leaving mortgage giants Fannie and Freddie limping forward.
Both companies were seized by the US government in 2008 amid heavy losses. They have sucked up US$150 billion ($190 billion) in taxpayer aid. As Wall Street has fled the market, the role of Fannie and Freddie has grown. They now back 85 per cent of new mortgages.
The two GSEs would be wound down gradually and replaced by private capital, under three possible scenarios sketched out in the White House’s set of proposals.
The three options are: End the government’s role in guaranteeing most mortgages; support the mortgage market only in times of stress; or provide a government guarantee for mortgage investments created by private companies.
Treasury Secretary Timothy Geithner told CNBC as the plan was being released that mortgage costs would rise over the long run. He said the administration wanted private capital to dominate mortgage finance.
“We can’t wait too long. It’s important Congress legislates some time over the next two years,” Mr Geithner added.
At the same time, the administration called for shorter term steps that would raise the cost of government-backed mortgages to make private-sector capital more attractive, while also reducing the huge loan portfolios of Fannie and Freddie.
The administration’s strategy aims to “open a dialogue with Republicans that would lead to a consensus outcome within a couple of years,” said Mr Michael Barr, a University of Michigan professor and former Treasury Department official.
For that to happen, Senate Democrats will have to come to an agreement on any long-term solution with Republicans who took control of the House of Representatives in January.
Representative Jeb Hensarling, a Republican and a leading voice for the party on financial issues, wants to eliminate Fannie and Freddie within five years, allowing the private sector to take over the government role.
The GSEs’ main job is to buy up mortgages that meet certain standards and then sell them on to investors as securities to free up cash for lenders to lend again.
Democrats are generally more supportive of a government role in the mortgage market and argue that removing the federal backstop for mortgages would make loans more expensive and price many middle class Americans out of homeownership.
The housing industry, including real estate agents, homebuilders and bankers support some government role for backstopping mortgages and have already started pushing back against some of the most aggressive privatization proposals.
Mr Paul Ballew, chief economist at Nationwide Insurance, said, “Housing’s at or near bottom, if we’re going to make changes, now’s the time.”
Source : Toady – 11 Feb 2011