Feb 9 The Obama administration wants the
private sector to play the dominant role in the U.S.
residential mortgage market and is expected this week to unveil
several scenarios for how that might happen.
More than 85 percent of U.S. residential mortgages are now
backed by the government in some way. Republicans want to bring
that down to zero, though they acknowledge such a transition
will take time.
At its heart, the debate over what to do about major
mortgage financing sources Fannie Mae FNMA.OB and Freddie Mac
FMCC.OB is an ideological one: How much help should the
government provide to the housing market?
Fannie Mae was established as a government agency in 1938
to support homeownership. In 1968, U.S. President Lyndon
Johnson privatized Fannie Mae to take its obligations off the
federal books and make the deficit look better amid high
spending for the Vietnam War. Freddie Mac was later established
as a competitor to Fannie Mae.
That government charter allowed the two firms to borrow
funds more cheaply than competitors because investors assumed,
though it was not written down, that the government would bail
them out if they ever got into trouble. Investors were right:
the government seized them in 2008 and they have since taken
more than $150 billion in direct taxpayer aid.
Policymakers from both sides of the aisle agree a new
system is needed. The debate is over what it would look like.
Following is an examination of the main issues under
Should there be an explicit government guarantee for
mortgages behind the charter for a new firm?
House Republicans want to eliminate the government backing
altogether and say the private market can better price the risk
of home mortgages than the government can.
Democrats see a need for government backing to make sure
mortgages are accessible to middle-class Americans.
Analysts estimate that the 30-year fixed-rate mortgage, the
most popular among U.S. homeowners, would cost between half a
percentage point to 3 percentage points more than comparable
loans backed by the government.
Mark Zandi, the chief economist at Moody's Analytics, pegs
the impact at just under 1 percentage point. "Regardless of
what policymakers say, global investors will almost surely
continue to believe the U.S. government would backstop a badly
foundering mortgage finance system," said Zandi, who has
proposed a new hybrid system that explicitly charges for the
Republican Representative Jeb Hensarling of Texas wants to
eliminate Fannie Mae and Freddie Mac within five years. Under
the proposal from Hensarling, the fourth-highest ranking House
Republican, the government's conservatorship of the two firms
would end within two years. They would then enter receivership
or be placed back into the market for a maximum of three more
Democrats are more supportive of a longer time-frame for
winding them down. Some industry proposals have pegged an
eight-to-10-year time-frame and others suggest 15 years or
The housing market is still in the midst of a serious
correction and some economists expect prices to plumb new lows
in coming months. The availability of mortgage credit has
become very tight since the bursting of the housing bubble. The
Mortgage Bankers Association sees mortgage lending falling this
year to levels not seen since 1997. The Obama administration's
proposals are expected to lay out three options for what could
be done and provide visions for what would happen under each
scenario. That multiple-choice format buys the administration
more time before charting a specific course in hopes the market
is less fragile when a new system is unveiled.
In exchange for their congressional charter, Fannie Mae and
Freddie Mac were required to make a certain percentage of their
loans to lower-income borrowers. As the private market for
so-called subprime loans began to grow rapidly during the
housing boom, the two firms lowered their lending standards to
capture market share. Some Republicans blame those affordable
housing goals for the financial crisis, though the Federal
Reserve has said the goals were not the cause of the crisis.
ROLE OF FHA
Established in 1934, the Federal Housing Administration
insures loans against default but does not make them directly.
Still, that government insurance is a more direct involvement
in the mortgage market than the indirect backing Fannie Mae and
Freddie Mac provide by buying up mortgages and selling some of
them to investors to help ensure a liquid mortgage market.
The FHA's market share of total new residential mortgages
has jumped from just a few percentage points during the housing
boom to more than 20 percent today. Both the Obama
administration and conservatives want to reduce the role FHA
plays in the mortgage market for healthy borrowers. As part of
a budget plan it will issue on Monday, the administration plans
to propose raising fees on FHA-backed loans as a way to prevent
borrowers flocking to FHA as they move away from loans
guaranteed by Fannie Mae and Freddie Mac.
At the end of the process, whenever that may be, it will be
harder for average homeowners to get a mortgage loan. Just how
much harder remains to be seen.
(Reporting by Corbett B. Daly; Editing by James Dalgleish)