The Obama administration released its “white paper” outlining the winding down and replacement of Fannie Mae and Freddie Mac. The goal of the proposals is to decrease the government’s involvement in the mortgage industry. The first proposal presented by the administration would create a government backstop under a federal reinsurance model. In the second proposal the government backstop would only be triggered in event of a crisis. The last option presented has no government backstop beyond existing federal agencies such as the Federal Housing Administration (FHA).
The paper also proposes reforming the current industry standards. The paper recommends raising the fees that Fannie and Freddie charge to lenders in order to make mortgages that are not government-backed more competitive. Another proposal includes a gradual increase in minimum down payments so that Fannie and Freddie can buy loans with a minimum 10% down payment. Lastly, the paper recommends slowly reducing the maximum loan limits Fannie and Freddie can purchase but does not specify to exact loan limits.
As part of the recommended reforms to the current mortgage industry, the paper also recommends reducing the role and financial exposure of the FHA. The administration says it will increase the annual insurance premiums borrowers of FHA backed loans pay later this year. The administration is concerned with phasing in any reform gradually to prevent increased chaos in the fragile mortgage and housing market.
