GSE Housing Financers Being Shown the Door

February 11, 2011

Fannie and Freddie are dead.

That’s how the Obama administration described troubled mortgage giants Fannie Mae and Freddie Mac on Friday.

The government-sponsored entities, or GSEs, are seen as partly responsible for the breakdown of the 2008 housing and financial markets.

But even before the crisis, opponents warned that the mortgage houses were risky, mainly because there was a guarantee that federal taxpayers would bail them out if they got in trouble.

And we have. So far, taxpayers have coughed up almost $150 billion to save these two plans since the government took over in September 2008.

“The GSE model is dead,” an Obama official said Friday.

The Treasury Department released a report that said the government should cease its support of the mortgage market over the next five to seven years and ultimately get rid of Fannie Mae and Freddie Mac.

“This is a plan for fundamental reform,” said U.S. Treasury Secretary Timothy F. Geithner, “to wind down the GSEs, strengthen consumer protection and preserve access to affordable housing for people who need it.”

The administration is offering three alternative plans:

*Privatize the housing-finance system and curb the government’s role to helping only low-income and veteran homebuyers.

*Have the government help low-income buyers at all times and intervene in the market during a crisis.

*Give the government a broader role that would guarantee mortgages provided by private insurers.

Under all these options, the taxpayers will take on a bigger role in housing finance. Currently, the government owns or guarantees more than 90 percent of all new mortgages.

There is even talk that government withdrawal could mean getting a 30-year fixed rate mortgage will be much more difficult as banks would opt for adjustable-rate mortgages that would fluctuate with the economy.

Whatever the decision, the Obama administration says the housing finance system should provide affordable housing for Americans.

“This report provides a strong plan to fix the fundamental flaws in the mortgage market and better target the government’s support for affordable homeownership and rental housing,” said Housing and Urban Development Secretary Shaun Donovan.

“We must continue to take the necessary steps to ensure that Americans have access to quality housing they can afford. This involves rebalancing our housing priorities to support a range of affordable options, from promoting much-needed financing for quality, affordable rental homes to ensuring the availability of safe, and sustainable mortgage products for current and future homeowners.”

Congress will ultimately make the final decision on the next direction we head.

Stay tuned.

Categories: Economy, Mortgages

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The phasing out of Fannie Mae and Freddie Mac will bring back private capital and banks to the real estate market and the playing field will be level for private capital investment. Borrowers will also be required to put down a larger down payment.

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