The Obama administration wants to raise fees for borrowers and require larger down payments for home loans as part of a long-term effort to restructure the nation’s housing market. But it warned that these measures could boost mortgage rates and make it harder for home buyers to secure the 30-year fixed-rate mortgage, a mainstay of American home buying for decades.
In a long-awaited white paper, the administration said it intends to wind down the federal mortgage giants Fannie Mae and Freddie Mac and curtail the Federal Housing Administration to help reduce the government’s outsized role in mortgage funding.
The housing finance system, which has ensured that Americans can get home loans, came crashing down in the financial crisis, helping fuel millions of foreclosures and the recession.
“I think it’s absolutely the case that the U.S. government provided too much support for housing, too strong incentives for investment in housing,” Treasury Secretary Timothy F. Geithner said Friday during a speech at the Brookings Institution. He noted that in addition to those fundamental mistakes, the government “allowed a huge amount of basic mortgage business to shift where there was no regulation or oversight.”
But in proposing a strategy for the future, administration officials acknowledged they are walking a tightrope. Any steps that dial back government support too dramatically — making mortgages more expensive — could extend the housing decline.
Geithner said that a new housing finance system without Fannie and Freddie could take seven years to put in place, suggesting it might fall in part to future administrations.
“We have to see the process of repair in the housing market completed,” Geithner said.
The white paper focuses on a series of short steps to increase fees and down-payment requirements. The administration hopes these measures will allow banks to more effectively compete in offering loans without government guarantees.
The report offers three options for replacing Fannie and Freddie. They include creating a new government agency that would continue to insure mortgages or a new agency that would step in only during times of crisis. Each, however, could put taxpayers at more risk of having to bail out the mortgage market during big declines.
The most drastic option would end government backing for home loans beyond the FHA. But the administration warned that this measure could affect access to credit for many potential homeowners. It could boost mortgage rates the most, the officials said, and it could make it harder for community banks to compete in the housing market.
In not offering a single long-term vision for the housing finance system, the administration sought to avoid a contentious clash with Republicans, who often have portrayed the mortgage giants as the chief culprit in the financial crisis. Republicans are likely to agree with the administration’s plan to reduce taxpayer support for mortgages over time.
But Rep. Spencer Bachus (R-Ala.), the new chairman of the House Financial Services Committee, said in a statement that while the proposal includes elements that GOP lawmakers have embraced in the past, it “isn’t a plan to move us forward, but rather a collection of opinions to consider. What’s needed is a real plan, and we intend to sit down with administration officials to find common ground ... we need legislation that protects taxpayers from further losses and future bailouts and builds a stable housing finance system based on private capital.”
To many Republicans and the Obama administration, Fannie Mae and Freddie Mac, are ill. But rather than healing them, both sides agree that the companies should be left to die and that their support for the housing market should wither away.
Some influential interest groups are taking issue with that surprising bipartisan consensus. They include small banks, real estate agents and consumer groups, who all say that Fannie and Freddie, or something similar, are crucial for sustaining the struggling housing market.
“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,” Barry Zigas, director of housing policy for Consumer Federation of America, said in a statement. “American consumers need policies that will foster affordable, long-term fixed rate mortgages, as well as a stable supply of capital that will be available to lenders of all sizes, including community banks and credit unions.”
In the short term, the administration suggested a range of new measures to make government-backed mortgage more expensive — helping private-sector firms to better compete in offering mortgages.
These include reducing the size of mortgages Fannie and Freddie may purchase, from $729,750 to $625,500, by this fall. It would phase out the companies’ 10 percent down-payment requirement. And it would raise fees that the companies charge to insure loans.
The administration also suggested scaling back the FHA, which caters to first-time home buyers with low down-payment options. The White House said it wants to reduce the size of loans that FHA can provide, increase fees by a quarter percentage point, and raise the down-payment requirement from 3.5 percent to 5 percent in the future.
The report emphasized the importance of rental housing for low and moderate-income communities.
John Taylor, president of the National Community Reinvestment Coalition, said his group supports the effort to expand affordable rental housing, but he feared the plan’s effect on working-class home buyers who couldn’t afford the higher upfront costs.
“There is universal agreement with the principle that people who cannot afford homeownership shouldn’t be put in an unsustainable loan,” Taylor said in a statement. “However, the administration’s proposal may be overly narrowing the window of opportunity for many blue-collar and low- and moderate-income people from realizing their dream of homeownership.”
Senior administration officials said they would take gradual steps to avoid harming the already struggling housing market. But they said the plan laid the groundwork for the future of U.S. housing.
“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.”
Mark Zandi, chief economist for Moodys.com, told CNBC that the Obama administration had “laid out a prudent, appropriate plan.”
“At the end of the day, though, the government is going to have to play some role in a catastrophic backstop,” he said.
Geithner agreed Friday, saying that whatever path lawmakers choose for Fannie and Freddie, there must in the future be “some capacity for the government to step in and protect the economy from the collateral damage that can come from that sort of crushing deleveraging, big withdrawal of private capital that happens in crises. But of course, doing that is terribly difficult.”