White House Seeks To Phase Out Fannie, Freddie

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The Obama administration announced its plans for Fannie Mae and Freddie Mac on Friday, saying it would like to see the mortgage giants phased out over the next five to seven years. The pair had to be taken over by the government at the height of the financial crisis, and have so far cost taxpayers more than $130 billion. But, troubled as they are, Fannie and Freddie now dominate the nation's housing finance system — which makes eliminating them a dicey proposition.

ROBERT SIEGEL, host:

From NPR News, this is ALL THINGS CONSIDERED. I'm Robert Siegel.

MELISSA BLOCK, host:

And I'm Melissa Block.

The U.S. government announced its plans today for Fannie Mae and Freddie Mac. The bottom line: It would like to see the mortgage giants phased out over the next five to seven years.

The pair had to be taken over by the government at the height of the financial crisis and have so far cost taxpayers more than $130 billion. But, troubled as they are, Fannie and Freddie now dominate the nation's housing finance system.

As NPR's Tamara Keith reports, that makes eliminating them a difficult proposition.

TAMARA KEITH: When it comes to mortgage finance these days, the government is just about the only game in town. But Treasury Secretary Timothy Geithner says it shouldn't be that way.

Secretary TIMOTHY GEITHNER (Department of the Treasury): We need to wind down Fannie and Freddie and substantially reduce the government's footprint in the housing market.

KEITH: The Obama administration proposes doing this by, among other things, requiring borrowers to make bigger down payments and reducing the maximum amount of a Fannie or Freddie-backed loan. Here's how Karen Petrou of Federal Financial Analytics describes it.

Ms. KAREN PETROU (Federal Financial Analytics): They're not being strangled. They're being asphyxiated - slowly, gradually and carefully.

KEITH: This would open up space for the private sector, private capital, to come back into the market. But administration officials say that's going to take some time and that reformers need to be cautious as they proceed because the housing market is so weak.

The plan released today is really more a set of ideas, possible paths, as Geithner joked at a Brookings Institution event earlier today.

Sec. GEITHNER: The way we describe this is, you know, we're all - we're going to drive west. Everybody wants to go west. We sort of know where we're going to go. But somewhere around Salt Lake City, we'll make a choice about what mix of ultimate options we're going to...

(Soundbite of laughter)

KEITH: The plan lays out three different levels of government involvement in the housing finance market and basically tosses Congress the task of deciding what to do.

Under option one, the government gets out of the housing business, except for FHA, which would have a much more limited role. This is the largely privatized model that many conservatives have been calling for. Lots of people, including Petrou, say consumers will pay if there's no government guarantee.

Ms. PETROU: It would mean a lot fewer mortgages at considerably higher cost.

KEITH: And the 30-year fixed-rate mortgage?

Ms. PETROU: I think a thing of the past.

KEITH: Option two is what one administration official called the national guard approach. Laurie Goodman is a mortgage strategist at Amherst Securities.

Ms. LAURIE GOODMAN (Mortgage Strategist, Amherst Securities): Option two is, well, gee, we kind of like option one, but the problem is that the private market wasn't there when we needed them the most during the crisis. There was no credit availability from the private market.

KEITH: So in times of crisis or recession, a government backstop would jump into place to make sure people can still get mortgages.

Option three is the one that seems to have gained the most traction with various industry groups and think-tank types. In this approach, private companies would guarantee the mortgages, and then, behind them, the government would be in place as a catastrophic reinsurer.

Again, Karen Petrou.

Ms. PETROU: With the government standing far behind the private sector to create that level of protection that investors around the world demand to buy a mortgage-backed security.

KEITH: The private companies and their shareholders would have to be totally wiped out before the government stepped in.

Still, the Obama administration admits that under this approach, theres a chance that private firms could take on excessive risk, and taxpayers would once again be left with the bill.

Laurie Goodman says those in the mortgage industry are meeting this overall plan and its three options with a yawn.

Ms. GOODMAN: I'm sure a lot of time and effort went into it, and very little came out of it. And what I think it served to underscore is it's a lot easier to say the present system isn't working than to figure out what to do about it.

KEITH: Tamara Keith, NPR News, Washington.

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