Blueprint calls for shifting U.S. housing finance to private sector

Mon Feb 25, 2013 12:27pm EST

* Bipartisan group recommends winding down Fannie, Freddie

* MBS issuance would be taken over by private sector

* Public guarantor for MBS under catastrophic circumstances; funding from premium payments

By Margaret Chadbourn

WASHINGTON, Feb 25 (Reuters) - A bipartisan research group called on Monday for winding down government-controlled mortgage finance firms Fannie Mae and Freddie Mac as part of an effort to have private lenders take on more of the risk of supplying the housing market with credit.

The proposal from the Bipartisan Policy Center aims to jump-start a stalled debate on the government's role in housing and help build a consensus for change.

Under the plan, banks and other private companies would take the lead not only in originating mortgages, but in issuing mortgage-backed securities as well.

The private sector would then bear the losses for defaulted mortgages, except in catastrophic circumstances, in which case a public guarantor funded by premium payments would provide a backstop.

"Our housing system is outdated and not equipped to keep pace with today's demands and the challenges of the imminent future," the group said in a report outlining its recommendations.

Fannie Mae and Freddie Mac buy mortgages from lenders and repackage them as securities for investors, which they guarantee. The firms were seized by the government in 2008 as spiraling mortgage losses threatened their solvency, and they have since drawn almost $190 billion from the U.S. Treasury.

The latest proposal, which was pulled together over the last 16 months by a 21-member commission, would attempt to shrink the government's footprint in housing and have private capital play a larger role, a process that promises to take years.

Fannie Mae, Freddie Mac and the Federal Housing Administration currently back nearly nine of 10 new mortgages. At a news conference to unveil the report, members of the commission said winding down Fannie Mae and Freddie Mac would be a five to seven-year process.

A Treasury Department official said the White House hopes the proposal moves the debate on housing finance reform forward and helps build a political consensus for change.

However, with Congress focused on budget debates and with immigration and gun control top priorities, action on housing is not likely to come until at least 2014. After years of red ink, Fannie Mae and Freddie Mac are now profitable and the housing market is recovering, taking away the urgency for action.

Still, both Democrats and Republicans generally agree the system needs to change.

"Greater federal intervention was necessary when the market collapsed, but the dominant position currently held by the government is unsustainable," the report stated.

In a first step to open the door wider for private capital, the report said Congress should gradually reduce the loan limits for government-guaranteed mortgages. The paper suggests limits of about $275,000 for loans eligible for government backing, down from $417,000.

Later, Fannie Mae and Freddie Mac would be replaced with a "public guarantor" that would provide a limited and explicit government guarantee for mortgage-backed securities, but would only step in if private insurance companies were unable to cover losses when loans default.

The public guarantor would oversee the mortgage market, set standards for the mortgages backing government-guaranteed securities, and determine which loan products would be eligible for federal backing. The guarantor would bear a risk only if private sector credit-risk bearers were wiped out.

To ensure taxpayers are protected, fees would be levied on mortgage-backed securities to fund the federal backstop.

Many Republicans dislike the idea of an ongoing government guarantee for the mortgage market. But the commission saw a need for the government to step in under unusual circumstances.

The commissioners made it clear they believed it would be important to ensure U.S. home buyers had access to 30-year fixed-rate mortgages. They also proposed new approaches for the distribution of federal rental subsidies and calls for greater attention to rental housing sector.

The commission was headed by two Democrats - former Senator George Mitchell and former Housing and Urban Development Secretary Henry Cisneros - and two Republicans - former Senator and Housing Secretary Mel Martinez and former Senator Kit Bond.

A couple walks along the rough surf during sunset at Oahu's North Shore, December 26, 2013. REUTERS/Kevin Lamarque

Find your dream retirement town

Florida? Hawaii? Reuters has teamed up with Zillow to give you the power to customize a list of your best places to retire.  Video | Full Article