Obama housing plan to end Fannie, Freddie

Fannie Mae and Freddie Mac would cease to exist under the housing plan released Friday by the Obama administration.

The highly anticipated report lays out a vision for ultimately winding down the troubled government-sponsored enterprises by inviting private dollars to crowd out government support for home loans. It lays out three options for the nation's housing market after Fannie and Freddie are wound down, with varying roles for the government to play.

It comes in response to a housing crisis that nearly brought down the financial system and ushered in the worst recession in a half-century. 

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"Our plan helps ensure that our nation's economic health will not be jeopardized again by the fundamental flaws in the housing market that existed before the financial crisis," the report from the Treasury Department and Department of Housing and Urban Development states.

Going forward, the report says, the government's role should be limited primarily to oversight and consumer protection, though it would continue to provide some targeted assistance to the housing market. It would fall to private institutions to be the primary source of mortgage credit and "bear the burden for losses."

"We are going to wind down Fannie and Freddie and gradually, but substantially, reduce the government's broader footprint in the housing market" said Treasury Secretary Timothy Geithner Friday. "We think there’s very broad consensus both on [Capitol] Hill and within the broader housing finance community about the need for a transition to a much smaller role for the government."

However, the plan rejects the notion of a housing system where the government does not assist low and moderate-income borrowers. Some Congressional Republicans had advocated for a wholly private housing system, with no government influence.

But one such advocate, Rep. Scott Garrett (R-N.J.) struck a generally agreeable tone about the report Friday. Garrett chairs the House Financial Services Committee's subcommittee on the GSEs.

"I'm encouraged to see the administration included a number of reform ideas that track closely with my own," he said in a statement. While there are obviously going to be some differences between the administration’s long-term vision and my own, I look forward to working with Secretary Geithner and President Obama to find a solution we are all amenable to."

The report invited lawmakers to help determine the "right balance of priorities for a new, predominately private housing finance market as soon as possible."

However, the administration also acknowledged that change cannot come "overnight," as the dismantling of Fannie and Freddie will be partly dependent on the conditions of the fragile housing market.

Geithner estimated the transition would take five to seven years. Two to three years are needed to allow the housing market to completely recover, and major housing reform legislation is still multiple years away, he added.

"We'll want to move towards legislation sometime in the next couple years," he said.

While a legislative remedy is not immediate, administration officials said there are steps they plan to take now to start the transition.

"We should not wait, we should move forward," said HUD Secretary Shaun Donovan.

The administration's plan still calls for some government assistance to ensure equal access to housing, but notably admits that homeownership is not necessarily an option for everyone.

"The government must ... help ensure that all Americans have access to quality housing that they can afford. This does not mean our goal is for all Americans to be homeowners," the report states.

Under the administration's plan, there would be no future Fannie and Freddie providing broad, full guarantees in the housing market, according to senior administration officials.

While the administration's report calls for the winding down of Fannie and Freddie, it does not reach a single conclusion as to what the housing market should look like at the end of the transition. Rather, it provides three options, with varying roles for the government to play.

Under the first option, the "vast majority" of the nation's housing would rest in private hands, except for government assistance targeted at specific groups, notably creditworthy lower- and middle-income borrowers.

The second option would retain the government assistance for certain groups, but also would include a "backstop mechanism" whereby the government could step in to provide credit during a housing crisis. Absent extreme circumstances, the government would stay largely out of the housing market, as in the first option.

In the third choice, the government would still provide assistance to certain borrowers, but also would reinsure some private mortgage securities to help provide liquidity and bring down credit costs. Under that arrangement, a group of private mortgage guarantor companies that meet certain requirements would guarantee certain mortgage-backed securities, and the government would provide reinsurance. The government would pay out to shareholders of those securities if the private guarantors are wiped out.

The administration noted in its report that the third choice would probably provide the cheapest access to mortgage credit of the three options, but also exposes the government to risk.

The administration also vows to tackle the nation's "broken systen of mortgage servicing and foreclosure processing," after widespread issues emerged during foreclosure proceedings in recent months.

To wind down Fannie and Freddie, the report identifies several steps that can be taken to invite the private market to come in and take the overwhelming market share currently held by the GSEs.

Increasing guarantee fees and down-payment requirements, along with other steps taken by the Federal Housing Finance Agency, can open the door for private parties to return to the housing market.

While Fannie and Freddie would be no more under the administration's plan, the report stated that the government will work to ensure that the GSEs have sufficient capital during the wind-down to continue meeting their existing guarantees.

This story updated at 9:50 am.