The Obama administration on Friday delivered a report to Congress that seeks to reform America's crippled housing finance market by eventually eliminating Fannie Mae and Freddie Mac and improving consumer protection and underwriting standards.
Delivered by Treasury Secretary Tim Geithner and Housing and Urban Development Secretary Shaun Donovan, the plan will likely take five to seven years, Geithner said during a conference call with reporters.
"This is a plan for fundamental reform – to wind down the government-sponsored enterprises (GSEs), strengthen consumer protection and preserve access to affordable housing for people who need it," said Geithner in a statement. "We are going to start the process of reform now, but we are going to do it responsibly and carefully so that we support the recovery and the process of repair of the housing market."
The 31-page report recommends using a combination of policy levers to wind down Fannie Mae and Freddie Mac, shrink the government's footprint in housing finance, and help bring private capital back to the mortgage market. The three-point plan would eliminate Fannie and Freddie, fix the "fundamental flaws" in the mortgage market and better target the government's support for affordable housing.
However, Sewell Chan of The New York Times wrote that while the report called for a substantial reduction in government support for the mortgage market, it provided few concrete details about how it should be accomplished. "In presenting the three options, the administration is taking an approach similar to the one adopted before the health care debate: setting out broad principles but leaving some of the thorniest choices to be decided by lawmakers," Chan wrote.
PNC Bank's economics group, headed by Chief Economist Stuart Hoffman, noted that the plan seeks to encourage private capital to return to the housing market, primarily through increased pricing at the GSEs. Other aspects of the plan include reducing conforming loan limits, phasing in a 10% down payment requirement, winding down Fannie and Freddie's investment portfolios by at least 10% a year, and addressing other distortions in the housing market, and encouraging rentals for those who can't afford mortgages.
"The plan is a just a first step, kicking off what figures to be a lively debate in Congress over the future of Fannie Mae and Freddie Mac," the PNC economists said.
Michael D. Berman, chairman of the Mortgage Bankers Association (MBA), said in a statement that the Obama report tracks the MBA's proposal from 18 months ago to create a system driven by private capital.
"Our proposal envisions an explicit, but limited, government guarantee of lower-risk mortgage-backed securities," Berman said. "The guarantee would be paid for by fees used to build a fund to protect taxpayers. We continue to believe that this is the most prudent approach, one that places the primary risk on private investors and ensures sufficient liquidity during times of economic stress in order to provide affordable mortgage finance in all types of mortgage markets."
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