Obama Administration to Offer Three Solutions for Fannie Mae, Freddie Mac Reform
Washington (AP) - The Obama administration is poised to release long-awaited proposals for reducing government support of the mortgage market, but Congress will choose the path for reforming financially teetering housing finance giants Fannie Mae and Freddie Mac.
The Treasury Department is scheduled to release a report Friday that lays out three choices for winding down Fannie and Freddie and moving to a more privatized mortgage market, according to a number of people familiar with the administration's approach.
The 20- to 25-page report will not endorse any of the options -- a decision by the administration designed to provoke a discussion about the role of government in housing finance without roiling the housing market or locking President Barack Obama to a particular solution.
Presenting the choices in Goldilocks fashion, the report's scenarios are:
--No government role, except for existing agencies like the Federal Housing Administration.
--A government role that explicitly guarantees mortgages only when the market is in trouble.
--A government role at all times, though not through government supported entities like Fannie and Freddie.
"Under any of the scenarios there's going to need to be more private capital in the housing system," said Michael Barr, who recently left his post as assistant treasury secretary to return to teaching at Michigan University Law School. "That's going to mean more pressure on interest rates."
The greater the government involvement, the milder the impact on borrowing costs. But more government involvement also places more taxpayer money at risk.
A complete withdrawal by the government probably would end the popular 30-year fixed rate mortgage or, at least, make it more expensive. Banks would prefer adjustable rate mortgages that would fluctuate with the markets.
Republicans complained that the administration is stepping back from one of the most consequential, and politically explosive, questions for the financial system.
"It's disappointing that the administration is abdicating an opportunity to lead and is instead opting to punt," said Kurt Bardella, spokesman for Darrell Issa, R-Calif., a vocal critic of Fannie and Freddie and chairman of the House Committee on Oversight and Government Reform. He said the administration postponed the release by promising a more specific plan this year.
"It's mind-boggling how the administration is not acting with more urgency to put forward a plan given the multibillion dollars taxpayers have at stake," he said.
But Republicans, who control the House of Representatives, have offered no specific plan of their own. And even conservative scholars concede that the remedy is less about urgency than it is about stepping away from the reliance on Fannie and Freddie at a moderate pace.
A report prepared by scholars at the conservative American Enterprise Institute, which the Treasury report is expected to allude to, calls for gradual withdrawal of Fannie and Freddie from the housing finance market over a period of five years.
Mark Zandi, an economist who has advised Democrats and Republicans, proposed the middle-of-the-road option of giving the government a role that insures mortgages only in catastrophic market conditions.
That type of insurance would be paid for by homeowners, he said, and it "would keep rates measurably lower, allow mortgage credit and would preserve the 30-year fixed rate mortgage."
The report comes as Republicans and Democrats struggle to find a way to find a way to repair the financing system for the nation's $11 trillion housing market. By offering options and spelling out the advantages and disadvantages of each, the report is designed to have a soft landing on Capitol Hill.
Recognizing that the changes in the system will be gradual, the administration is in no hurry to demand a quick fix.
At a House hearing Wednesday, neither Republicans nor Democrats displayed a desire to push specific plans or timetables for overhauling Fannie Mae and Freddie Mac. Republicans, however, have long argued the two mortgage lenders were central players in the 2008 financial meltdown and have called for their demise.
The report also is expected to call for the gradual reduction of Fannie's and Freddie's combined $1.5 trillion portfolios. The administration would like to reduce the government's mortgage support from about 95 percent of all mortgages to somewhere below 50 percent within five to seven years.
It also would support trimming the maximum size of mortgages they can purchase from the current high of $729,750 to $625,000. Congress set the higher rate in 2008 and it expires in September.
Associated Press writer Alan Fram and AP Business Writer Daniel Wagner contributed to this report.