Plans for Reforming Fannie and Freddie Nearing
The Obama administration and House Republicans are settling into a game of chicken over Fannie Mae and Freddie Mac, with each side daring the other to advance a plan for replacing the two housing finance companies.
The White House missed a deadline at the end of January for telling Congress what it wants to do. That report will be released as early as Friday, people with knowledge of its contents said, but it will present a range of options without stating a preference.
One possibility favored by some of President Obama’s economic advisers, and by many Republicans, would not create any federal replacement for Fannie and Freddie, leaving the private markets to provide mortgages for most Americans. The alternative approaches instead would continue some form of federal mortgage backstop.
The report will describe a plan for winding down the two companies, which were taken over by the government in 2008. Initial steps will include preventing the companies from buying loans larger than $625,500, and increasing the fees they charge for loan guarantees, according to officials who spoke on condition of anonymity so as not to pre-empt the official release.
The report will describe reforms in other areas of the mortgage business, including enhanced borrower protections, changes in mortgage servicing to address the industry’s failure to work with borrowers who fall behind on payments, and new steps to clean up loan securitization, the bundling of loans for sale to investors.
House Republicans, meanwhile, outlined a plan last year to end government ownership of the two companies, and campaigned on the issue in the fall. But they have since adopted a more cautious posture. Instead of pushing forward with legislation, they have scheduled a hearing for Wednesday to weigh alternatives.
The diminished urgency on both sides reflects the political realities of power-sharing, the fear of doing further damage to housing prices, and a great deal of uncertainty about the best approach to rebuilding the mortgage business.
“Industry-defining legislation often takes more than one Congress to pass,” said Peter Swire, who served until August as a special assistant to President Obama on housing finance issues. “I think everyone wants a bigger role for private-sector housing finance going forward, and how to do that transition is just a big job.”
Representative Scott Garrett, the New Jersey Republican who is chairman of the House subcommittee that deals with housing finance, on Monday told a mortgage conference in Florida that the government should leave the mortgage business.
“I believe that, if there is to be any government assistance to homeownership, it should be limited to first-time homebuyers or rental housing,” Mr. Garrett said.
But he added that he was not yet ready to move forward with legislation, telling the audience that he intended to explore the issues and develop a consensus.
There remains a general agreement among members of both parties that Fannie Mae and Freddie Mac should eventually disappear. The question is what should take their place.
The administration’s decision to present a menu of options rather than a single plan reflects internal divisions. Timothy F. Geithner, the Treasury secretary, and Shaun Donovan, Housing secretary, are among the advisers who believe that the government must provide a backstop for the industry, in part to ensure the loan availability. Some of the president’s economic advisers, however, believe that such a guarantee amounts to an unnecessary subsidy, transferring taxpayer money to private lenders.
But Michael S. Barr, who served until December as the assistant Treasury secretary for financial institutions, said the decision was made to improve the White House’s bargain position with House Republicans.
“The administration sees a lot of advantage in not stepping out strongly in one particular path because House Republicans will view that as an easy target,” said Mr. Barr, who has returned to his position as a professor of law at the University of Michigan. “If you lay out a bunch of options, you preserve the ability to have a conversation where after a long period of time you achieve a consensus outcome.”
Democratic leaders on Capitol Hill share the administration’s view that it makes sense to press Republicans to move forward with their plan.
“They told me they knew the answer,” said Representative Barney Frank, the ranking Democrat on the House Financial Services Committee, referring to Republican insistence that housing should be addressed in last year’s legislation on financial regulation. “They campaigned on that. They had the solution. How come they don’t know now what they knew then?”
One compromise described in drafts of the administration’s proposal would reduce the government’s role to a last line of defense for the mortgage market. A version of this idea has been advocated by David S. Scharfstein, a finance professor at Harvard who previously worked as an adviser to Mr. Geithner.
The core of Mr. Scharfstein’s proposal is to create a new government-owned corporation for the sole purpose of providing guarantees to mortgage investors. During normal times, the insurer would guarantee no more than 10 percent of mortgages, but in times of crisis, the government could raise that cap, offering guarantees to a broader range of investors so that money continues to flow into the mortgage market and credit remains available.
“We think private markets can do a good job providing mortgage credit during normal times, but the value of a government guarantee is really most pronounced during times of crisis,” Mr. Scharfstein said in an interview Tuesday.
The administration’s plans for winding down Fannie and Freddie are likely to command support on both sides of the political aisle. Roughly 90 percent of the money invested in mortgages currently flows through Fannie, Freddie and the Federal Housing Administration, which guarantees loans of lesser value.
The government already has told Fannie and Freddie to raise the fees that lenders are charged, reducing the incentive to sell loans to the government, encouraging private alternatives.
The White House also plans to express support for allowing limits on the size of loans the companies can buy to drop back to a maximum of $625,500. Congress voted in 2008 to raise that limit as high as $729,750, which will expire in September.
The companies also will be required to gradually reduce their huge portfolios of mortgage-backed securities, which they purchased as investments. Losses in those portfolios led the government to seize the companies in 2008.
“We’re going to lay out a set of reforms to crowd private capital back in the business, to dial back the role of the government over time,” Mr. Geithner said in a recent interview on the “Charlie Rose” show. That would create a window of several years to work out what happens next.