- The Washington Times - Friday, February 11, 2011

The Obama administration Friday morning endorsed a very gradual phasing-down of the enormous role Fannie Mae and Freddie Mac now play in the housing market, taking a first step by reducing the size of loans they can guarantee.

The plan would allow the limit on loans to fall from the current level of $729,000 in major cities like Washington to $625,000 on Oct 1, as scheduled under current law. The limit on loans that can be insured by the Federal Housing Administration (FHA) would drop to the same level. The plan would also phase in a requirement that homebuyers supply at least a 10 percent downpayment on all loans backed by Fannie and Freddie.

To begin easing Fannie and Freddie out of the near-exclusive role they play in providing the funds for prime mortgages, the plan would also increase the amount the two mortgage giants charge for their guarantee. That will make mortgages more expensive, but also enable more private banks to step in and provide financing without having to compete with the cheaper alternative available from Fannie and Freddie.

“We’re going to wind down Fannie and Freddie,” said Treasury Secretary Timothy Geithner, noting that the plan would also continue to reduce the enterprises’ giant portfolios of mortgage loans by at least 10 percent a year.

The paring of portfolios is aimed at diminishing or eliminating their past controversial practice of trying to eke out profits through hedge fund-like investing tactics in sub-prime mortgages. It was those questionable mortgage purchases that largely caused the collapse of the two giants and their federal takeover in 2008. The government has spent nearly $150 billion so far covering losses on the bad loans.

“There is a broad consensus about the need for a transition to a smaller role for the government” in the housing market, but accomplishing this through legislation and gradual administrative changes could take several years, Mr. Geithner said.

“We are going to start the process of reform now, but we are going to do it responsibly and carefully so that we support the recovery and the process of repair in the housing market,” he said.

“Our plan is centered on bringing capital back to the private market” through the gradual scaling back of the mortgage giants, said Shaun Donovan, secretary of the Housing and Urban Development Department.

Mr. Donovan said the FHA will also start to wind down its role by increasing its insurance fees so as to encourage more private insurers to enter the market and compete with the Depression-era housing insurance agency. The FHA traditionally provided insurance for low-income home purchases, but the housing crisis also greatly expanded its role to encompass 30 percent of the mortgages made to people of nearly all income levels in recent years.

Mr. Donovan warned against attempts by some legislators to simply eliminate the FHA, Fannie and Freddie immediately rather than gradually reducing and minimizing their activities as the administration is proposing.

He said moving too quickly without ensuring private alternatives are available would jolt the still-fragile housing market back into a “double-dip” recession. The market since 2007 has been in its deepest recession since the Great Depression.

The administration proposed a set of options for winding down the government’s massive role in housing finance, ranging from fully privatizing the market for prime mortgages over time and leaving only a narrow role for the FHA in providing moderate-income assistance, to preserving a fully paid-for government guarantee on prime mortgages that would provide an emergency backstop for the private market in times of crisis like that seen in the last three years.

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