Private markets would be the primary source of mortgage credit going forward under the Obama Administration's plan to reform the housing finance system.
The long-term plan, announced this morning at the Treasury Department briefing, would "wind down" Fannie Mae and Freddie Mac, target the government's assistance to low and moderate-income home owners and renters and leave the vast majority of the mortgage market to the private sector.
The White House pledged to work with the Federal Housing Finance Agency, the GSEs' regulator and conservator, to provide an orderly transition toward a reduced role for the two firms, which were pillars of the nation's housing finance system for more than seven decades before they strayed from the original mission five years ago. In that regard, it called on the FHFA to increase the GSEs' guarantee fees, reduce their conforming loan limits and increase their downpayment requirements.
FHA Commissioner David Stevens told National Mortgage News that while there is "no arbitrary time-line" to close down Fannie and Freddie, the effort has to be "deliberate" and is likely to be "longer rather than shorter." But the Administration's Housing Finance Reform White Paper released this morning said that "as the market begins to heal and private investors return, we will seek opportunities, wherever possible, to accelerate" the GSEs' withdrawal.
Under the Obama plan, the Federal Housing Administration, the Department of Veterans Affairs and the Agriculture Department would be left to provide housing finance assistance for narrowly targeted groups of borrowers -- the FHA for low and moderate-income families, the VA for veterans and the USDA for borrowers in rural locations.
But warning that complete privatization would leave the government with very little it could do to ensure liquidity during times of crisis – not to mention increase the cost of and access to home loans for most Americans – the Administration proposed two other possible scenarios: One, a backstop mechanism that would "scale up" when private capital withdraws in times of financial stress, and the other, catastrophic reinsurance for securities consisting of a targeted range of mortgages.
In the White Paper, the Administration said it considered recommending the nearly complete privatization of the housing finance system as well as the opposite alternative, the near complete nationalization. But in that the former would "too dramatically" limit access to as well as increase the cost of mortgages money for most Americans and the latter runs "too high a risk" of crowding out private capital, it decided that neither one represents a long-term viable strategy.
Rather, the White Paper says, "the right course falls between the two extremes."
The Administration said it is committed to ensuring that Fannie and Freddie have sufficient capital to perform under any guarantees issued now or in the future, saying it "will not pursue policies or reforms in a way that would impair (their) ability to honor their obligations."
It also said that determining the appropriate path or how to "responsibly wind down" the two companies will "require great care" so as not to upset the still fragile housing market. But it left no doubt that the GSEs' days are numbered, saying "we will ultimately need to complete the transition to a more privatized market."
Said FHA Commissioner Stevens: "Everybody in the (Obama) Administration believes strongly that the role of government in housing needs to be fundamentally transformed."
