Plan would reduce federal government’s role in mortgage market

Reporting from Washington and Los Angeles â€” 

The Obama administration is moving to dramatically downsize the government’s role in the mortgage business, saying taxpayers can no longer afford the cost and the risk of subsidizing home loans on a grand scale.

The administration’s plan calls for gradually shutting down Fannie Mae and Freddie Mac, which now control nearly half of the $11-trillion mortgage market. The two companies have cost taxpayers $150 billion since they were seized by federal regulators in 2008.

Real estate industry groups attacked the proposal, saying it would make it tougher for average Americans to get home loans and thereby weaken the housing market.

“A reduced government presence in the mortgage market will raise the cost of homeownership and make mortgages less available,� said Beth L. Peerce, president of the California Assn. of Realtors.

Still, there is bipartisan consensus in Washington that the government can’t afford to continue propping up Fannie and Freddie and that the private sector needs to play a much bigger role in making home loans available.

“I think we can all agree the status quo is unsustainable and housing finance reform in the United States is way overdue,� said Rep. Scott Garrett (R-N.J.), who heads the House subcommittee overseeing Fannie and Freddie. “I’m encouraged to see the administration included a number of reform ideas that track closely with my own.�

Rep. Barney Frank (D-Mass.) called the plan “a thoughtful beginning.�

“The central question going forward is how to protect taxpayers without unduly increasing the cost of mortgages to American families,� he said.

Under the plan, Fannie and Freddie’s role in mortgage financing largely would be replaced by private companies over a period of five to 10 years, though how that happens has yet to be hammered out.

The 32-page plan released Friday contains three options for Congress to consider in what is expected to be lengthy debate and negotiation:

The government would significantly scale back its role by offering only a limited, secondary guarantee for mortgage-backed securities for a “targeted range of mortgages.�

A greater pullback in which the government would step in with guarantees only during a recession to provide an “emergency backstop� to keep the housing market from collapsing.

A near-complete pullback in which the government would provide support only for low-income buyers through the Federal Housing Administration, which historically has served about 10% to 15% of the market.

Created as government-sponsored entities, Fannie and Freddie were tasked with purchasing home loans and guaranteeing mortgage-backed securities, thus keeping a ready pool of money available to mortgage lenders to make more loans.

After becoming public entities with shareholders to consider, the two companies took on more business and less conservative investments. They were largely blamed for fueling the risky subprime market, which crashed four years ago and led to economic woes worldwide.

“I think it’s absolutely the case that the U.S. government provided too much support for housing, too strong incentives for investment in housing, and we just took that too far,� Treasury Secretary Timothy F. Geithner said at a forum at the Brookings Institution think tank.

But, fearful of damaging the still-fragile housing market, the administration proposes to go slowly.

To begin the pullback, the plan calls for gradually raising the down payment required for Fannie and Freddie guarantees to 10% from as low as 3%. At the same time, the maximum size of mortgages they could guarantee would be reduced — a move that would affect Southern California and other high-cost areas.

During the financial crisis, Congress boosted the mortgage limit to as much as $729,750. The administration said Friday that it wanted to let that drop back to $625,500, as scheduled, on Oct. 1.

The plan also calls for increasing mortgage guarantee fees charged to lenders as an incentive to encourage more private investment while winding down the huge portfolios of Fannie and Freddie by at least 10% a year as the entities are slowly put out of business.

“This is a plan for fundamental reform of the housing market, but I want to emphasize we’re going to proceed on this path of reform very carefully,� Geithner said.

Key House Republicans reacted positively because the plan dovetails with their calls to get the government largely out of the mortgage business. But they want to phase out Fannie and Freddie more quickly.

“The time for debating the merits of options has long passed,� said Rep. Ed Royce (R-Fullerton), a longtime critic of the entities. “Now is the time to act.�

But housing advocates and liberal Democrats said they were concerned about the consequences of the proposals. Rep. Maxine Waters (D-Los Angeles) said that while reform was needed, the administration’s proposals could “radically increase the cost of homeownership, and housing in general.�

Richard Green, director of the USC Lusk Center for Real Estate, said the short-term changes would have a big effect in the pricey Southern California market.

“I think people need to put money down, I have no quarrel with that. It is not clear with me that it needs to be 10% in order for mortgages to be safe,� said Green, who is a former Freddie Mac official.

“You really are shutting out, in particular, minority communities where levels of wealth accumulation are much lower than non-minority ones,� he said. “I worry a lot about that.�

But the administration was blunt about how much the government can do, saying access to affordable housing “does not mean our goal is for all Americans to be homeowners.� To fill the gap, the plan calls for more federal support for rental housing.

Many in the banking industry have said the government needs to maintain more of a role in housing finance, particularly during times of crisis when lenders wouldn’t want to issue new mortgages.

The Housing Policy Council of the Financial Services Roundtable, which represents 32 leading mortgage finance companies, said the option with a secondary government guarantee, which would kick in if private insurers of mortgage-backed securities went bankrupt, is “the most viable and realistic.�

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