Under a plan outlined by the Barack Obama Administration, the Federal National Mortgage Association and the Federal Home Loan Mortgage Corp. would lose their advantage over fully private firms and liquidate their huge investment portfolios. The plan calls for lower loan limits, higher fees and bigger down payments.
The administration plans to wind down Fannie Mae and Freddie Mac, a Treasury Department statement Friday said. The government’s “current footprint in housing finance” will be reduced, though the timeline for such a move will be “responsible” and subject to market conditions.
The strategy was outlined in a report to Congress.
The current government share of the market is 90 percent, according to the statement. But the administration said primary reliance for home loan financing should lie with the private sector in a normal market — though the lax regulation of such private activities is a thing of the past.
One of the steps in winding down Fannie and Freddie would be to eliminate their capital advantage so that they are on a level playing field with fully private companies like Wells Fargo & Co. In addition, their capital requirements would be placed on par with private financial institutions.
“Although the pace of these increases will depend significantly on market conditions, the administration recommends bringing Fannie Mae and Freddie Mac to a level even with the private market over the next several years,” the statement said.
High-cost conforming limits as high as $729,750 were temporarily established through the Housing and Economic Recovery Act. But the temporary limits are set to expire on Sept. 30, and today’s statement indicated that the expiration should be maintained — bringing the maximum limit back to $417,000 on Oct. 1.
The executive branch also wants to eventually raise the minimum down payment on all conforming conventional loans to 10 percent.
The plan promises increased transparency for investors — a mandatory component of the securitization system. It also promises improved underwriting standards and increased skin in the game for originators.
As of Dec. 31, 2010, Fannie’s investment portfolio was $789 billion, while Freddie’s was $697 billion. The administration proposes winding down those portfolios at an annual rate of 10 percent.
“Throughout the transition, we remain 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,” the statement said. “This assurance is essential to continued economic stability.”
Fannie and Freddie’s regulatory, the Federal Housing Finance Agency, was “pleased” that the administration put forward a plan.
“Certain elements of the administration’s framework involve preparing the enterprises, the Federal Home Loan Banks, and other market participants for the transition to a future structure for housing finance,” FHFA Acting Director Edward J. DeMarco said in a statement. “We will consider and discuss with the administration the details of the framework announced today, consistent with our responsibilities as conservator and regulator.”
But by reducing the share of conventional conforming originations, the administration does not want the Federal Housing Administration to pick up the slack. Temporary higher limits on FHA-insured mortgages should be allowed to expire along with the temporary conforming limits, and the FHA limit should subsequently be further reduced.
Obama’s 2012 budget calls for a 25-basis-point increase in FHA’s annual insurance premium.
Other objectives outlined in the plan include the establishment of national servicing standards, servicer compensation reform and the addition of new second lien disclosures.
For the impacted employees at Washington, D.C.-based Fannie and McLean, Va.-based Freddie, the administration noted that it looks “forward to continuing to work with them to find ways to develop and implement the longer term reform solutions that the administration determines together with Congress.”
Edward Pinto, the former chief credit officer at Fannie who has been critical of how the government-sponsored enterprises have been utilized, joined his colleagues at the American Enterprise Institute for Public Policy Research in commenting on today’s announcements.
“We are delighted to see that the administration has recognized the importance of focusing most of the housing finance in private markets, and adopts the idea of gradually winding down Fannie and Freddie,” Pinto, along with Alex Pollock and Peter Wallison, said in a formal statement.
But the trio criticized the administration for not bringing “itself to recognize the hazard to the taxpayers that is implicit in any government role in housing finance.”
