Proposal to Limit Government’s Mortgage Role

The Obama administration has released a much-anticipated proposal for overhauling the troubled U.S. mortgage market.

In a 32-page report, “Reforming American’s Housing Finance Market-A Report to Congress,” the government suggests incrementally winding down Fannie Mae and Freddie Mac and also recommends reducing the government’s now-key role in housing financing.

The report suggests phasing in a requirement requiring a 10% down payment for loans guaranteed by Fannie and Freddie, while at the same time reducing the maximum size of mortgages they can back.

The government report also advocated increasing mortgage fees as a means to facilitate and encourage additional private investment while winding down the huge investment portfolios of Fannie Mae and Freddie Mac.

Currently, Fannie Mae and Freddy Mac either own or guarantee more than half of all U.S. mortgages in the $11 trillion mortgage market.

The three primary options being offered in the report include:
• Limiting and scaling back the government’s role in insuring and guaranteeing mortgages.
• Providing the government with a backstop that would result in the government “scaling up” with guarantees largely only during a recession or housing crisis.
• Limiting the government’s role in the market to supporting only low-income buyers through the Federal Housing Administration. This option would provide for the mortgage market outside the FHA and other federal agency guarantees to be driven by private investment decisions with private capital taking the primary credit risk.