Obama administration seeking to wind down Fannie, Freddie

/ Source: msnbc.com news services

The Obama administration is seeking to wind down financially-troubled housing finance giants Fannie Mae and Freddie Mac.

The proposal is part of a long-awaited plan released Friday by the U.S. Treasury Department for what could lead to the most sweeping changes to the way Americans buy their homes in decades.

Friday’s housing “white paper” presents three long-term options to reduce the government's role in the housing market. The paper also takes several shorter term steps aimed at raising the cost of government-backed mortgages.

The administration’s proposals will bring Fannie and Freddie’s share of the housing market down to 40 percent over five to seven years, Treasury Secretary Timothy Geithner told CNBC Friday. He added that he hopes lawmakers will vote on the administration’s proposals within the next few years.

“We want the private market to take the dominant role [in the mortgage market],” Geithner told CNBC, noting that the U.S. housing market needs another two to three years to recover first.

Another suggestion, mentioned in the report, recommends phasing in a 10 percent down payment requirement for loans guaranteed by Fannie and Freddie, according to documents obtained by Reuters.

Fannie and Freddie buy up mortgages made to certain standards and sell them to investors to free up cash for lenders to lend again.

The two firms were seized by the Bush administration in late 2008 amid mounting losses from loans gone bad and have since taken more than $150 billion in taxpayer aid.

The administration's strategy aims to “open a dialogue with Republicans that would lead to a consensus outcome within a couple of years,” said Michael Barr, a professor at the University of Michigan and a former Treasury Department official.

Senate Democrats will have to come to an agreement on any long-term solution with Republicans who took control of the House of Representatives in January.

Texas Representative Jeb Hensarling wants to eliminate Fannie and Freddie within five years, allowing the private sector to take over the government role.

The fourth highest ranking House Republican has not yet formally introduced his bill to do that, and it is unclear when he might do so.

Democrats are generally more supportive of a government role in the mortgage market and argue that removing the federal backstop for mortgages would make loans more expensive and price many middle class Americans out of home ownership.

“I want to make sure the window of opportunity for home ownership isn't closing for the next generation of homeowners,” said John Taylor, chief executive of the National Community Reinvestment Coalition, an association of community-based groups that promote access to basic banking services for working families.

The housing industry, including real estate agents, homebuilders and mortgage bankers is also supportive of some government role for backstopping mortgages and have already started pushing back against some of the most aggressive privatization proposals.