By John W. Schoen Senior producer
msnbc.com
updated 2/11/2011 9:49:26 AM ET 2011-02-11T14:49:26

More than three years after the housing market collapsed, Congress and the White House have made virtually no headway cleaning up the financial quagmire left behind by the two government-sponsored mortgage giants, Fannie Mae and Freddie Mac.

Major Market Indices

On Friday, the Obama administration took its first tentative steps at sorting through the rubble. But it will likely take many more years — and hundreds of billions of dollars — before the mess can finally be cleaned up.

The White House stopped short of unveiling a broad, final plan for reforming the nation's housing finance system.  Instead, it proposed three approaches to winding down the two  agencies, now controlled by the federal government. 

Story: Obama administration seeking to wind down Fannie, Freddie

Friday’s housing “white paper” presents three different visions for replacing mortgage finance giants Fannie and Freddie. The paper does not make a single recommendation, but broadly outlines alternative possibilities to reduce the government’s role in the mortgage market.

Specific reform proposals include:

  • Shrinking the size of the portfolio of mortgages held by government housing finance agencies by at least 10 percent a year.
  • Creating an insurance fund for mortgages much like bank deposit insurance, supported by premiums paid by lenders.
  • Winding down government subsidies of mortgages by raising the fees charged to cover the risk of default.
  • Limiting the government’s role in housing finance to Federal Housing Administration backing of mortgages, turning most of the market over to the private sector.
  • Phasing in a 10 percent down payment requirement for government guaranteed loans.

It’s taken this long to wade into the morass of government-backed mortgages because there are no easy solutions. Simply shutting down the agencies would add billions of Fannie and Freddie’s future losses to the government’s already swollen debt, on top of the $150 billion already paid out to cover bad loans.

Story: Rate on 30-year mortgage rises to 3.90 percent

“Someone has to pay it,” said John Taylor, president and chief executive officer of the  National Community Reinvestment Coalition. ”It doesn’t miraculously disappear. We sponsored these loans and now, with the companies going under, we have to make good on the loans.”

  1. More must-see stories
    1. The Hartford Courant, Political
      Wild Wall St.

      Has the market volatility got you nervous? These cartoons may give you a little comic relief.

    2. Cyber-thieves create fake Kelley Blue Book site
    3. US says Reebok toning shoes don't really
    4. Can you live on $9 an hour? Play the game

Shutting down Fannie and Freddie tomorrow would leave home buyers with little access to affordable loans. The housing bust forced so many private lenders to shut down or stop lending that the two agencies now back more than 90 percent of home loans written today.

“The concern you have to have is that if you pull the government-guaranteed sector back too quickly you’re left with nothing,” said David Berson, a former Fannie Mae chief economist. "Any changes have to be done prudently and over time so the purely private market can come in and take its usual share of the market.”

Berson figures that transition could take five years, or more.

With a dearth of private lending available today to take up the slack, a government pullback of new mortgage guarantees could send the already-feeble housing market tumbling.

But private mortgage lenders argue that they just can’t match the low mortgage rates made possible by taxpayer-supported guarantees.

Story: Rate on 30-year mortgage rises to 3.90 percent

“Right now, it’s impossible for the private capital markets to compete with a free government guarantee backed by the U.S. taxpayer,” said Tom Deutsch, executive director of the American Securitization Forum. "Unless or until that’s reduced, the private markets will continue to be very, very small."

Disastrous conflict
Government support for the mortgage market began during the Great Depression when widespread bank failures and a shortage of lending capital made mortgage loans too expensive for most home buyers to afford, or impossible to get. To revive the mortgage and housing markets, the newly created Federal National Mortgage Association (later dubbed Fannie Mae) bought loans that met certain criteria and underwriting standards, freeing up capital to lend to more home buyers. 

In the 1970s, Fannie Mae and its younger cousin, Freddie Mac, were sold off to investors, leaving them with a new mission of maximizing profits for shareholders. When the growth of unregulated, risky lending exploded during the housing boom earlier in the last decade, these two congressionally chartered mortgage agencies scrambled to catch up with unregulated lenders by jumping into the profitable but risky market for subprime loans, with disastrous results.

Readers, did the economy or housing crisis delay your divorce plans? Today, the task of fixing housing finance is made more difficult by a sharp political divide and deep philosophical differences about the role that government should play in the mortgage market. Many Republicans, who believe that role should be dramatically scaled back, argue that the housing bubble was the result of government policies that heavily promoted homeownership to families who couldn’t afford it. Private lenders, they argue, can adequately provide housing finance to any and all qualified buyers, without interference from the government.

Democrats who support continued government involvement in mortgage lending believe that public support of housing finance is needed to guarantee access to affordable loans for the middle class. They also argue that only government backing can ensure a steady flow of loans during hard times when private lenders pull back.

For the moment, there seems to be little middle ground.

“Most people in Congress understand that this is a very political, contentious issue,” said Berson. “It’s going to be a very volatile ride as we move toward what ultimately will be the future of Fannie and Freddie. It’s hard to know what that’s going to be.”

The White House is playing something of a game of political chicken with GOP opponents of government support for housing finance. By presenting a series of proposals, instead of specific legislation, the Obama administration seems to be trying to provoke House Republicans to counter with their own concrete plan.

Housing finance reform is a also hot issue for some of the country‘s most powerful political lobbies. Both the real estate and home building industries strongly support continued government backing of mortgage lending. Community banks and credit unions fear that if mortgage lending is left entirely to the private sector, smaller lenders will be shut out of the market by the biggest players.

The White House proposal to create a government-run mortgage guarantee fund – similar to bank deposit insurance – would help blunt critics of government subsidies by replacing them with fees paid by lenders. But it’s not clear whether such a fund could be ramped up quickly enough to win enough confidence from enough private lenders to keep the mortgage market adequately supplied with capital.

Eliminating all government guarantees against default would also likely raise the cost of borrowing, potentially reducing the availability of mortgages and depressing the housing market. Higher borrowing costs also could put homeownership out of the reach of some households – especially first-time buyers - that have benefited from government-sponsored mortgage lending for generations, according to Taylor.

“If Congress or the administration decides to eliminate (government-sponsored loans), then Wall Street and the private market have an obligation to provide affordable housing, or we’ll see a radical reduction in the number of working class and blue-collar people who can own homes,” he said.

© 2013 msnbc.com Reprints

Video: Geithner on mortgage reform

Data: Latest rates in the US

Home equity rates View rates in your area
Home equity type Today +/- Chart
$30K HELOC FICO 4.36%
$30K home equity loan FICO 5.08%
$75K home equity loan FICO 4.51%
Credit card rates View more rates
Card type Today +/- Last Week
Low Interest Cards 10.96%
10.86%
Cash Back Cards 16.44%
16.41%
Rewards Cards 15.97%
15.95%
Source: Bankrate.com