Administration proposals to overhaul federal housing role draw fire from left

By Zachary A. Goldfarb and Brady Dennis
Washington Post Staff Writers
Saturday, February 12, 2011; 1:25 AM

The Obama administration's plan to overhaul the U.S. housing market drew fire Friday from some of the president's traditional allies, who argued that proposals in the newly released report could make it too costly for many Americans to buy a home.

But while consumer and civil rights groups broke with President Obama over the long-awaited white paper, the plan met with little objection - and even praise - from Republicans, who have pilloried the administration over its housing policies.

Senior administration officials offered a series of suggestions for scaling back the federal role in the housing market, which has been on government life-support since the mortgage meltdown three years ago. In the near term, the administration wants to require larger down payments and higher fees for home loans and reduce the number of borrowers getting government-backed loans. Beyond that, the plan calls for eliminating Fannie Mae and Freddie Mac and putting private financial firms at the center of the mortgage market.

The housing initiative is the latest example of the administration tacking to the political center, even at the expense of alienating Democratic constituencies that had provided crucial backing for Obama's economic policies earlier in his term. Dissent has been mounting on his left flank since he reached a tax deal with Republicans in December that, in part, kept the rich from facing higher levies. Obama's appointment of William M. Daley, a former J.P. Morgan Chase executive, as White House chief of staff further fueled those concerns.

The objections raised by some liberal groups offered a preview of the coming battle over the housing plan, which will be joined by an array of interest groups, including bankers, builders and the real estate brokers, that have a stake in how the nation's $11 trillion housing finance system is reshaped.

Real estate agents and home builders oppose policies that would shrink the federal subsidy for housing. Small banks don't want to see the government overly reduce its role in the housing market, for fear that the largest banks could then dominate the arena.

But the most vocal concerns Friday were raised by some of the same groups that had cheered Obama last year for overhauling the nation's financial regulations and establishing the Consumer Financial Protection Bureau.

"The administration today has laid out a series of options that could lead to the abandonment of a nearly 70-year commitment to affordable homeownership by working American families," said Barry Zigas, director of housing policy for the Consumer Federation of America.

Fannie and Freddie's role

Since 2008, the government has insured more than 90 percent of new home loans through Fannie Mae and Freddie Mac and the Federal Housing Administration, which targets first-time home buyers. These measures have helped keep mortgage rates low at a time of extreme stresses in the housing market.

But the administration's proposals would scale back this support. Over the next year or so, officials are seeking to reduce the size of mortgages that Fannie, Freddie and the FHA can insure and increase the fees the agencies charge.

The administration declined to provide a vision for the longer-term changes in the housing market, but it offered three potential options.

One is identical to the plan put forward by Republicans: Replace Fannie and Freddie with nothing and keep the mortgage market almost totally in the hands of banks. The second option is to create a new federal program that would insure mortgages in times of crisis but otherwise eliminate the government role. The third is to set up a federal program to insure mortgages at all times.

Each of those approaches, according to the white paper, would substantially reduce the level of government backing for housing.

Most economists agree that withdrawing this support would probably lead to an increase in mortgage rates, though there is considerable debate about how much more expensive home loans would become.

A coalition of progressive groups, including the National Council of La Raza and the NAACP, released a statement Friday expressing concern about all three proposals, saying the first two "would entirely fail" to meet the goal of ensuring that families have access to credit and "will instead marginalize communities of color."

This dismay was echoed by liberal members of Congress on Friday.

"My underlying concern is that they may radically increase the cost of homeownership, and housing in general, over the coming years," said Rep. Maxine Waters (Calif.), the top Democrat on the House panel overseeing housing finance.

By contrast, the Republican chairman of the panel, Rep. Scott Garrett (N.J.), welcomed the plan.

"I'm encouraged to see the administration included a number of reform ideas that track closely with my own," he said. "I think we can all agree the status quo is unsustainable and housing finance reform in the United States is way overdue."

Gradual steps

The proposals released Friday represent the culmination of more than a year of official deliberation over how to address Fannie and Freddie and the rest of the mortgage finance system. The two mortgage giants have cost taxpayers more than $130 billion since the George W. Bush administration rescued them in 2008.

During these discussions, top Obama administration officials, including Treasury Secretary Timothy F. Geithner, expressed reservations about what they considered excessive government support for housing. At the same time, senior officials concluded that powerful lobbying groups, including real estate agents and community banks, would probably launch insurmountable opposition to any dramatic decrease in the federal role, according to sources familiar with the matter who spoke on the condition of anonymity to describe internal discussions.

Sources said the administration chose to announce short-term steps that would find agreement with Republicans - thus avoiding a partisan fight - while delaying decisions about long-term policies.

In the coming months, the administration is likely to take only modest steps to withdraw government support for the housing market, postponing debate about a long-term fix well into future - perhaps into future presidencies.

The housing market remains, after all, deeply depressed, and low mortgage interest rates have been a crucial medicine keeping the market from an even steeper decline by making it cheaper to buy a home. But those rates have been trending upward recently, even before details of the new housing plan were disclosed.

Geithner said Friday that a new system could take seven years to put in place.

"This is a plan for fundamental reform - to wind down [Fannie and Freddie], strengthen consumer protection and preserve access to affordable housing for people who need it," Geithner said. "We are going to start the process of reform now, but we are going to do it responsibly and carefully so that we support the recovery and the process of repair of the housing market."

Administration officials hope these baby steps will entice banks to begin offering private mortgages in segments of the market where Fannie and Freddie's role is reduced or withdrawn.

"This isn't strangling Fannie and Freddie now, as critics demanded, but it would surely lead to inexorable asphyxiation if the administration acts on its proposals," said Karen Petrou, managing director of Federal Financial Analytics. "As the garrote grows tighter, parts of the private market will spring to life."

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