Fannie and Freddie Would Survive in New Form Under Obama Plan

Tuesday, 16 Aug 2011 01:38 PM

 

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 The Obama Administration is working on a proposal to maintain a large government role in mortgage finance, effectively preserving most of the functions of Fannie Mae and Freddie Mac, according to a person with direct knowledge of the effort.

The primary goal is to encourage reliable sources of residential lending by continuing an 80-year-old practice of government guarantees on most home loans. At the same time, the administration wants to reduce government’s dominance in the system by imposing limits on Fannie Mae, Freddie Mac or their successors.

In February, U.S. Treasury Secretary Timothy F. Geithner and Housing and Urban Development Secretary Shaun Donovan presented Congress with three options for weaning the almost $11 trillion mortgage market from its dependence on government.

There is no timeline for delivering the new proposal, which is based on one of the options in the February report, according to the person, who did not want to be identified because the work is in an early stage.

The administration also is exploring steps it can take in the interim without legislation to shrink the companies’ role in the market, the person said.

White House spokesman Matt Vogel said President Barack Obama has made no decision to move forward with a particular plan.

‘Winding Down’

“We remain committed to winding down Fannie and Freddie, though such significant measures would need to be done gradually and with care,” Vogel said. “We believe that it is essential to bring private capital back to the center of a reformed housing system.”

The administration has been working to develop scenarios under all three options, Vogel said. “All three options remain under active consideration and we are deepening our analysis around how each would potentially be implemented.”

Washington-based Fannie Mae and its smaller rival, Freddie Mac in McLean, Virginia, were chartered by Congress to boost the availability of home loans. For a fee, the companies buy and guarantee home loans which they then bundle and sell.

Government’s implied guarantee of the mortgage-backed bonds helped create investor demand. Today the companies own or guarantee more than half of U.S. home loans.

A credit crisis triggered by subprime mortgage lending drove the two companies to near collapse in 2008. That year, they were seized by the government and have drawn more than $170 billion in aid to remain solvent.

Government Role

Since then, the administration and Congress have been exploring ways to rebuild the market. Policy makers disagree on how big a role government should play in a new system.

The option being explored by the administration is based on the proposal in the February report that retained the largest government role and hews closest to the current system.

It would allow private companies to buy, bundle and sell loans that meet certain criteria, much like Fannie Mae and Freddie Mac do now, and provide government-backed “catastrophic reinsurance” on the securities should they fail. The government would charge a fee for the insurance, which would be used to offset any losses to taxpayers and in theory, would prevent future bailouts.

The government reinsurance would kick in only after the private companies have taken the bulk of the losses, according to the report.

© Copyright 2014 Bloomberg News. All rights reserved.

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