February 10, 2011 / 8:33 PM / 7 years ago

Obama housing paper includes government insurance fund

WASHINGTON (Reuters) - President Barack Obama's housing revamp options to be unveiled on Friday include creating an insurance fund for mortgage-backed securities that is similar to the Federal Deposit Insurance Corp, sources familiar with the document told Reuters.

The paper lays out three legislative choices for making long-term changes to the U.S. housing finance system, while also taking near-term steps to slowly lessen the government's role in the mortgage market now dominated by Fannie Mae and Freddie Mac.

The paper separately backs a gradual wind-down of the two firms by increasing the fees they charge, making it easier for privately backed loans to compete. That could be done without Congress.

Another alternative in the document includes leaving the Federal Housing Administration as the sole mechanism for government-backed mortgages, leaving most of the market to the private sector.

Newly empowered Republicans in the U.S. House of Representatives and Democrats in the Senate would have to come to agreement on which course to follow.

Having taken more than $150 billion in direct taxpayer funds since being seized by the government more than two years ago, Fannie Mae and Freddie Mac are the largest recipients of bailout assistance stemming from the financial crisis of 2007-2009.

Policymakers have deliberately delayed decisions on what to do about Fannie Mae and Freddie Mac while the U.S. housing market remains fragile.

By not presenting a single concrete legislative proposal, the administration has shifted pressure to House Republicans to make the next move.

Texas Representative Jeb Hensarling, the fourth highest ranking Republican, has a plan to wind-down Fannie Mae and Freddie Mac within five years and let the private market fill their role.

Hensarling, however, has not yet introduced his plan and it is unclear when Republican leaders may begin to take action on that bill.

A middle course would be to set up a system that would allow the government to backstop a substantial number of mortgages only during times of crisis.

The most government involvement would involve creation of an insurance system that would provide "catastrophic coverage" for mortgage bond investors.

The government, however, would only be on the hook as a last resort because the private firms creating the mortgage bonds would be the first to take losses if borrowers defaulted. Only if those firms went under would the government pay the bondholder.

Additional reporting by Rachelle Younglai; Editing by James Dalgleish and Diane Craft

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