February 15, 2011 (Chris Moore)
The consensus from the release of the Obama Administrations proposal on what to do with Freddie Mac and Fannie Mae is that there is no consensus. The internet has been abuzz with commentary from main street media to the blogging world with analysis, opinions, predictions, forecasts, etc. about the Presidents much anticipated 31 page White Paper on how to minimize government’s involvement in the mortgage industry.
The report held few surprises though, having been leaked the week before. The goals of the government’s plan was to ensure minimal housing and mortgage disruption, leave it to Congress to actually determine the plan, and minimize the impact to taxpayers in pursuing the goal of keeping future government involvement in the mortgage business to a minimum.
Although ultimately the road to the demise of the two GSE’s runs through Congress, the Administration apparently couldn’t come up with just one comprehensive approach on how to deal with the mortgage giants and fielded these three basic options:
1) A privatized system with very limited government backing and a focus on low to moderate income households;
2) A privatized system with a “springing guarantee” that increases government support in times of crisis; and
3) A reduced structure whereby the government only participates in catastrophic reinsurance.
There are many pros and cons depending on which side of the fence you’re sitting on. One of the main points of the proposal will be to replace much of the money from government programs with private investor money. The fear is that this may raise interest rates and to reduce risk, banks may require higher down payments, which right now would be a death wish to the housing market.
On the other side, increased down payments means less risk, which could lower interest rates. Others expect fees to rise, making the cost of loans more expensive.
Meanwhile, Republicans in the House of Representatives convened their first meeting last week chaired by New Jersey Republican Scott Garrett to discuss their view of how to deal with the demise of the two GSE’s. Garrett indicated his belief that the Congress should give more immediate focus to dealing with Fannie Mae and Freddie Mac by saying this in his opening statement:
“While a lot of recent attention has been given to the impending Treasury proposal and what the future of U.S. housing finance will look like, I believe there are other areas of this debate we can focus on right now. In particular, I believe the question we all need to be asking ourselves is: What immediate steps can Congress take right now—this instant—to protect taxpayers, end the bailout, get private capital off the sidelines, and reduce the government’s exposure to the housing market?”
At this point, no one really knows what the outcome will be, but depending on how you want to carve up the responsibility of the housing crisis due to the toxic loans that Freddie and Fannie purchased to help fuel the housing bust, it is a proposal whose time has come.
The press release can be read here.
Tags: fannie mae, freddie mac, obama administration, gse, mortgage business, toxic loans, housing market