U.S. Treasury Secretary Timothy Geithner had laid out plans on Friday to reform Fannie Mae and Freddie Mac. The government took over the two troublesome mortage giants since 2008. A blueprint plan of Fannie and Freddie reform was supposed to be released last month, but Mr. Geithner pushed the date into February. Mr. Geithner laid out three options to reform the housing market:
Option 1: No government role, except for existing agencies like the Federal Housing Administration and guaranteeing mortgages for low and moderate income Americans.
Option 2. A government role that supports the mortgage market directly and explicitly guarantees mortgages only when the market is in trouble.
Option 3. A government role at all times, though not through government supported entities like Fannie and Freddie.
Here is more from the U.S. Treasury report:
Our plan champions the belief that Americans should have choices in housing that make sense for them and for their families. This means rental options near good schools and good jobs. It means access to credit for those Americans who want to own their own home, which has helped millions of middle class families build wealth and achieve the American Dream. And it means a helping hand for lower-income Americans, who are burdened by the strain of high housing costs.
But our plan also dramatically transforms the role of government in the housing market. In the past, the government’s financial and tax policies encouraged housing purchases and real estate investment over other sectors of our economy, and ultimately left taxpayers responsible for much of the risk incurred by a poorly supervised housing finance market.
Going forward, the government’s primary role should be limited to robust oversight and consumer protection, targeted assistance for low- and moderate-income homeowners and renters, and carefully designed support for market stability and crisis response. Our plan helps ensure that our nation’s economic health will not be jeopardized again by the fundamental flaws in the housing market that existed before the financial crisis. At the same time, this plan recognizes the fragile state of our housing market and is designed to ensure that reforms are implemented at a stable and measured pace to support economic recovery over the next several years.
Under our plan, private markets – subject to strong oversight and standards for consumer and investor protection – will be the primary source of mortgage credit and bear the burden for losses. Banks and other financial institutions will be required to hold more capital to withstand future recessions or significant declines in home prices, and adhere to more conservative underwriting standards that require homeowners to hold more equity in their homes.
Securitization, alongside credit from the banking system, should continue to play a major role in housing finance subject to greater risk retention, disclosure, and other key reforms. Our plan is also designed to eliminate unfair capital, oversight, and accounting advantages and promote a level playing field for all participants in the housing market.
The Administration will work with the Federal Housing Finance Agency (“FHFA”) to develop a plan to responsibly reduce the role of the Federal National Mortgage Association (“Fannie Mae”)
and the Federal Home Loan Mortgage Corporation (“Freddie Mac”) in the mortgage market and, ultimately, wind down both institutions. We recommend FHFA employ a number of policy levers – including increased guarantee fee pricing, increased down payment requirements, and other measures – to bring private capital back into the mortgage market and reduce taxpayer risk. As the market improves and Fannie Mae and Freddie Mac are wound down, it should be clear that the government is committed to ensuring that Fannie Mae and Freddie Mac have sufficient capital to perform under any guarantees issued now or in the future and the ability to meet any of their debt obligations. We believe that under our current Preferred Stock Purchase Agreements (PSPAs), there is sufficient funding to ensure the orderly and deliberate wind down of Fannie Mae and Freddie Mac, as described in our plan.
It sounds like Mr. Geithner wants to unwind down the role of the government in the housing market. Mr. Geithner said, " I think it is absolutely the case that the U.S. government provided too much support for housing, too strong incentives for investment in housing and we just took that too far." So far, it has cost the taxpayers about $150 billion. Fannie and Freddie have almost 90% of the mortgages that are being originated and we really got to start weaning the housing market off the government.
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