Obama Administration Proposes Major Revision To Fannie Mae and Freddie Mac

With all the news coming out of Egypt, it's easy to overlook major news stories domestically. This is perhaps one of the biggest stories of the day.

WASHINGTON — The Obama administration released a broad outline on Friday for the future of housing finance in the United States, calling for a substantial reduction in government support for the mortgage market but providing few concrete details about how it should be accomplished.

In a 31-page report, the administration proposed that the two mortgage lending giants, Fannie Mae and Freddie Mac, should be gradually abolished within 10 years at most, and it gave Congress three options for reducing the government’s role in supporting homeownership. It did not recommend an option; instead, the document was intended to set parameters for what is certain to be a heated and protracted debate.

There's no word on how this transition will take place, or how much money this will ultimately cost taxpayers, but it does show that the Administration understands that the existing housing/real estate/mortgage scheme is unworkable.

Under one option, the government’s historically dominant role in insuring or guaranteeing mortgages would shrink substantially, and would be limited to support for creditworthy borrowers with low and moderate incomes. The other two options would preserve a role for the government as an insurer of mortgages — but only in times of financial turmoil, under one possibility.

Fannie and Freddie, which were placed in government conservatorship in September 2008, along with the Federal Housing Administration currently guarantee more than 90 percent of all new mortgages. The F.H.A. alone guarantees about 30 percent, compared with a historical norm of roughly 10 percent to 15 percent.

The first option would limit the government’s role in insuring or guaranteeing mortgages to programs targeted at creditworthy borrowers with low or moderate incomes. It would let capital flow from housing to other sectors of the economy, reduce systemic risk and minimize taxpayer exposure to potential losses. Under this option, mortgages for most Americans would be significantly more expensive.