U.S. Treasury Secretary Timothy F. Geithner will present Congress with three options for reducing the government’s role in the nation’s decades-old housing finance system and shrinking the footprint of mortgage companies Fannie Mae and Freddie Mac, according to two people familiar with the plan.
Geithner will release the proposal as soon as Friday, according to an administration official, who spoke on condition of anonymity yesterday because the proposal isn’t public. One option would eliminate the two firms and their government-backed guarantee of mortgages while another would hew closer to the present system, according to the two people familiar with the plan.
President Barack Obama met with Geithner and other top aides at the White House yesterday to put final touches on the proposal, according to the administration official.
Under the Dodd-Frank financial regulatory overhaul enacted in July, the administration was required to submit to lawmakers a plan for ending taxpayer support for Fannie Mae and Freddie Mac. The government took control of the companies in September 2008 and they since have drawn more than $150 billion from the Treasury to cover losses linked to sub-prime mortgages.
The administration’s white paper will offer options for change without proposing legislation. Rather, it’s designed to present a path for luring private capital back into the housing finance market and reducing government’s role in insuring mortgage-backed bonds.
Ideas for coaxing private capital into the system may include increasing the insurance premiums charged by Fannie Mae and Freddie Mac and forcing them to shed loans in their nearly $1.5 trillion portfolios, according to the official and the two other people, who didn’t want to be identified because they said the proposal still could change.
The administration also may suggest reducing the size of loans that the government-sponsored enterprises can insure, the people said. Such conforming loans now are capped at $729,750 and will fall to $625,500 on Oct. 1 if Congress doesn’t act.
One of the three options is likely to be a complete government withdrawal from the mortgage-guarantee business now dominated by Fannie Mae and Freddie Mac, according to the people who have been briefed on the plan.
A second option would phase out the government’s guarantee of mortgage-backed securities until it is left as an insurer of last resort, stepping in only in the event of a catastrophic market failure.
The third option would be a less-dramatic reduction of government support that is closest to the current system.
The administration’s plan will run between 20 and 30 pages, according to one person familiar with it.
Congress established Washington-based Fannie Mae in 1938 and Freddie Mac of McLean, Virginia, in 1970 to increase the capital available for home lending by packaging mortgages into bonds for sale to investors. The companies insured bond buyers against losses, with an implied promise that the U.S. government would make investors whole if the system failed.
$11 Trillion System
As private lending to home-buyers declined after the credit crisis, the government-sponsored enterprises became even more dominant in housing finance. Because they own or guarantee more than half of all U.S. mortgages and have grown crucial to keeping capital flowing to lenders and borrowers, a broad restructuring of the $11 trillion mortgage system is expected to take years.
Policy makers already are taking steps to reduce the government’s exposure to the mortgage market. The enterprises are under orders from Congress to shed loans held on their portfolios by about 10 percent a year, until they total no more than $250 billion. At the end of 2010, Fannie Mae held nearly $790 billion and Freddie Mac nearly $700 billion.
Representative Scott Garrett, a member of the House Financial Services Committee who will take a lead role on housing reform, wants to accelerate that sell-off.
“I understand that selling some of these assets more rapidly could have an effect on their price,” the New Jersey Republican said in a Feb. 7 speech. “But almost every market participant I talk to says it can happen faster and, if it does, that it will reduce taxpayer risk.”
The enterprises also are strengthening their balance sheets by rejecting riskier loans and forcing banks to buy back loans that didn’t meet underwriting standards.
As the administration assembled its report to Congress, it drew on ideas from hundreds of groups, including real estate trade associations, financial companies, small banks, housing advocates and policy shops.
Most have offered ways to reduce government involvement in the system, while cautioning policy makers to move with caution to avoid roiling the market.
Republicans and groups including the American Enterprise Institute have proposed phasing out the GSEs completely, starting with reducing the size of loans they can buy.
Investors already have demonstrated that they don’t need a government guarantee because they are selling those non- conforming, or jumbo, loans, said Representative Jeb Hensarling, a Texas Republican and vice chairman of the House Financial Services Committee.
“We have a competitive market in jumbo, we have a competitive market in sub-prime,” Hensarling told reporters. “I haven’t concluded that you have to have a Fannie Mae or Freddie Mac to securitize these mortgages.”
Many proposals for maintaining a limited government role in housing finance follow the contours of plans being circulated by the Housing Policy Council, a coalition of financial companies; the Mortgage Bankers Association; and a Washington-based policy group, the Center for American Progress. All want to encourage private insurers to take on the role played by Fannie Mae and Freddie Mac. Under those proposals, the government would stand as the insurer of last resort.
Real estate groups have said that relying on big financial institutions to insure mortgages could cause too much concentration in the industry and might not provide enough capital to create stability in the market.
“What the crisis taught us is that without government backing, mortgages might not be available,” Lawrence Yun, the chief economist for the National Association of Realtors, said in an interview. “The idea that privatization will limit taxpayer loss doesn’t match up with reality. You can bet we’ll bail out those banks.”
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