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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)

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Administration officials say any steps they take will be gradual.

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"You have to make sure other people are coming" into the market as the government exits, said an administration official. "You don't want to leave a hole in the market where credit-worthy borrowers can't get any credit. The government is guaranteeing 95 percent of the market. It's not like it's just going to stop tomorrow."

One idea under discussion is to create a government insurance fund for mortgages. Banks would make home loans, and a new mortgage insurance company would charge a fee to insure the loan. Then the new government fund would charge a second fee to provide another layer of insurance. If the loan went bad, the government insurance fund would cover the loss only if the private mortgage insurance company had collapsed.

Peter Swire, who helped oversee mortgage finance policy at the National Economic Council earlier in the Obama administration, said a government guarantee is necessary because the government will still be on the line if the housing market crashes.

"My reading of history is when the housing system is tanking in any major economy, governments have intervened," said Swire, a law professor at Ohio State University. "We'll get all of the problems of an eventual government rescue without the safeguards."

goldfarbz@washpost.com dennisb@washpost.com

Staff writer Dina ElBoghdady contributed to this report.

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