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Friday, February 11, 2011

Obama Administration White Paper on Fannie Mae/Freddie Mac

The Obama administration has produced a white paper that proposes raising fees for borrowers and requiring large down payments for home loans as part of a long-term effort to reduce the government's participation in the housing market.  The administration white paper recommends winding down Fannie Mae and Freddie Mac, which together with the Federal Housing Administration provide more than 90 percent of housing finance. 

The recommendation could increase mortgage rates and potentially reduce the availability of the 30-year fixed rate mortgage. The process could take five or more years.

It discussed three options for replacing them, including:

1) a new government agency that would insure mortgages all the time,

2) a new agency that would only step in during times of market crisis, and

3) No government backing for home loans beyond the FHA.

The Center believes the federal government should get out of backing Fannie Mae and Freddie Mac. Taxpayers should not be at risk for bailing out the mortgage market. The Center is recommending the break up of both institutions and dividing each of them into 10 units in different regions of the country that compete with each other for mortgages.

The administration suggested a range of new measures to make taking a government-backed mortgage more expensive and thereby making it more competitive for private sector firms to compete in offering mortgages. These include reducing the size of mortgages Fannie and Freddie can purchase, from $729,750 now to $625,500 by this fall. It also includes phasing a 10 percent down payment requirement for the companies. Finally, it includes raising fees the companies charge to insure loans.

The administration also suggested scaling back FHA, which caters to first-time homebuyers with low down-payment options. It said it wants to reduce the size of loans that FHA can provide, increase fees by a quarter percentage point, and potentially raise the down payment requirement from 3.5 percent now to 5 percent in the future. (Wash Post, 2/11/2011)

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