White House Wants To Revamp Mortgage Market

Fannie Mae and Freddie Mac operated as housing-finance giants for 40 years. They sold mortgages as securities to investors and put up the money if a mortgage went unpaid. When the housing market got into trouble they lowered their requirements and got themselves into even more trouble. They were taken over by the government roughly two years ago and now the government wants to phase out Fannie Mae and Freddie Mac.

A congressional debate has started about options to finance homes without the two huge businesses. Everyone is eager to learn what kind of business or plan the government will start to take their places. Lots of ideas and questions are coming from both parties, but no one has put forth a definite plan. Michael Barr, a former assistant Treasury secretary in the Obama administration suggests multiple proposals and unifying the things that must be done into a list. Some options that have been talked about are:

1. No government role except for agencies already in existence.
2. Small government role. It would step in during bad times.
3. Large government role. It would always be present.

The government – which means taxpayers – have put $134 million into helping Fannie Mae and Freddie Mac. Some ways that have been mentioned to help the government get out of the market include lower maximum loan limits for mortgages, higher fees charged to banks for mortgage guarantees, and higher down payments on government-backed loans.

Will this raise borrowing costs for home buyers? Will the assumption of government help during troubled times affect investors? Will taxpayers be more at risk due to government backstops? Will policy makers feel the pressure to under-price their guarantees? Should their be a new government agency to regulate the market? Whatever is decided, no one wants a vulnerable system or a troubled housing market.

For more details, see the full story here.