Housing finance changes likely to mean less government backing for some buyers

Dec. 29 (Bloomberg) -- Chuck Gabriel, an analyst at Capital Alpha Partners LLC, talks about the outlook for overhauling Fannie Mae and Freddie Mac, which were seized by the federal government in 2008. Gabriel speaks with Peter Cook on Bloomberg Television's "Fast Forward." (Source: Bloomberg)
Washington Post Staff Writers
Friday, February 4, 2011; 12:08 AM

The Obama administration is likely to recommend reducing the size of mortgages eligible for government backing, according to current and former officials, a move that could make getting a home loan in high-priced areas such as the Washington region more expensive.

Administration officials, who are preparing a white paper on overhauling the nation's housing finance system, are looking at scaling back the support provided during the mortgage crisis to help the ailing real estate market.

In the District and most of its neighboring counties, home buyers have benefited from a temporary federal policy that has allowed mortgages up to $729,750 to receive government backing. Such home loans typically carry lower interest rates than those without government support, because investors are attracted by the official guarantee.

The administration is now likely to suggest that Congress allow the policy to lapse as scheduled in September, lowering the loan limit to $625,500.

The proposal to let the higher limits lapse is among the most concrete elements in the long-awaited review, which examines various options for reshaping the role government plays in the mortgage finance market.

The report, which will in part address the fate of the troubled mortgage giants Fannie Mae and Freddie Mac, is scheduled to be released as soon as next week.

The white paper comes in response to one of the prime causes of the financial crisis - a breakdown in the system that funnels money to home buyers. The collapse of Fannie Mae and Freddie Mac, which sit at the heart of that system, has proved to be the most expensive legacy of the crisis. The government seizure and rescue of the firms in September 2008 has cost taxpayers more than $130 billion.

At the same time, the companies have been essential cogs in the home loan market, providing billions of dollars in funding to keep interest rates low at a time when most private financial firms have abandoned the mortgage finance business.

The review is still being debated by policymakers at the White House, the Treasury Department and the Department of Housing and Urban Development, according to sources familiar with the discussions.

"These discussions are ongoing, but the president has not made decisions on any policy options," said a White House official, who like others interviewed for this article spoke on the condition of anonymity to comment on internal talks.

The report's release has already been delayed twice, attesting to the economic and political challenges confronting its authors.

The housing market is still in the doldrums, and any significant policy changes could have a major impact on the affordability of housing. Changes could also affect economic relations between the United States and other countries, for instance China and Japan, because of their large holdings of securities backed by American home loans.

CONTINUED     1        >

© 2011 The Washington Post Company