Obama's Mortgage Reforms: Stronger Standards but Higher Costs

The Obama administration has proposed a comprehensive revamp of the nation's housing finance business to reduce the nation's dependence on struggling government-backed enterprises Fannie Mae and Freddie Mac. But it's clearly expecting an uphill fight in Congress on virtually every detail of the plan, and so it has offered multiple policy options, essentially passing the political hot potato to the Republicans.

"This is a plan for fundamental reform," said Treasury Secretary Timothy Geithner in a statement that accompanied the reform proposals. He said the administration is proposing the "wind down" of Fannie and Freddie, strengthening consumer protection and preserving access to affordable hosing.

"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," Geithner said.

Up to $400 Billion in Losses

In the wake of the financial crisis, the private sector has essentially bailed out of housing finance. The government-backed enterprises Fannie and Freddie, and the Federal Housing Administration, now account for 90% of the market for home mortgages. But Fannie and Freddie have already run up $150 billion in losses, a figure that's expected to rise to between $300 billion and $400 billion when the final bill for the housing bubble is tallied.

Because of those huge losses, the is pressure on both sides of the political aisle to reduce the government's financial exposure to mortgages in the future. But the still-weak condition of the housing market makes it difficult to act without making things worse.

"This is going to encounter a lot of political opposition, not just from Democrats and Republicans debating it, but the whole issue of can we really do anything given the fragile state of the housing market," says Guy Cecela, publisher of Inside Mortgage Finance. "If we're worried about selling homes every month, how can we talk about raising the costs of mortgages or anything else that is going to slow down any sort of recovery?"

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The Obama administration proposals include raising the rates Fannie and Freddie charge to banks for loan guarantees to the same levels as private banks. Private mortgages for so-called jumbo loans, which are not covered by government guarantees, currently cost between 0.5% and 0.75% more than government-backed mortgages. So, if Fannie and Freddie's fees were to rise to the market level, mortgage rates across the U.S. might rise substantially.

The administration also proposed lowering the maximum value of a mortgage that can qualify to be federally backed from the current $729,750 to $625,500. That's a widely suggested move that would attract the private sector to make more loans in the upper range of the market. The proposal also called for Fannie, Freddie and the FHA to set a minimum down payment requirement of 10%. Currently, the agencies are authorized to make loans with no down payments at all.

The big issue is what to do about the government guarantee that assures investors who buy Fannie and Freddie mortgage bonds that the U.S. government will pay back the bonds in the event the underlying mortgages default. Because of that guarantee, Fannie and Freddie can offer lower interest rates than the private sector. Investors, especially foreign investors, were burned by subprime bonds during the financial crisis, and now they won't touch private mortgage bonds without a government guarantee.

Taking Loan Guarantees Private

"I don't think there is any question the administration wanted to throw this in the lap of the Republicans who control the House and say, 'Here are some of the alternatives. You pick one and try to defend it,'" Cecela says.

Anthony Sanders, a professor of real estate finance at George Mason University in Fairfax, Va., says the Obama proposal sounds nice but is too vague to accomplish much. "They give the impression they might be open to getting rid of Fannie and Freddie, but they're saying let's first try returning them to their pre-bubble status," Sanders says. "The problem with that approach is that in 2002 they blew out of control and pumped trillions of dollars into the housing market. What's to prevent them from doing that again?"

Sanders says the government guarantee could be replaced by insurance companies backing private bonds, but this would cost consumers more and require stricter lending standards, such as a 20% down payment.

Both Cecela and Sanders say any effort to remove the government guarantee will be fiercely opposed by a wide range of special interests, especially by groups such as real estate agents and homebuilders who are struggling in the current housing market malaise.

How Many Years Will It Take?

"The traditional housing interests would like as much government support as possible and will argue you can't change government programs until the housing market recovers in two to three years," Cecela says.

The Obama proposal does not set a specific deadline, but indicates that it will take at least five years to implement some of the proposed changes.

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There are over 100 different law enforcment angencies in America..how many can you name. I think to many .

February 22 2011 at 9:59 PM Report abuse +1 rate up rate down Reply

strengthening consumer protection and preserving access to affordable hosing.

See full article from DailyFinance: http://srph.it/h12q0u

Haven't we been hosed enough?

February 14 2011 at 10:11 PM Report abuse rate up rate down Reply

The inane comments I just read are deeply concerning to me. Most people have no idea what this article is about, yet they convey their "inane" thoughts and then some fool responds to them. Sounds like government workers. This move has all the potential to finally relieve us of the burden of FANNIE and FREDDIE and their monstrous burden on society. But it won't work. There are so many people involved (10s of thousands employes) at Fannie and Freddy that they make up a pretty big voting block by themselves. You can't fire them, and you can't retire them so you continue to pay for them. As for who makes up the difference when unqualified buyers want to buy an expensive home, "you still do." It'll happen through increases in income tax or some other method of taxation that you don't realize it's happening.

February 14 2011 at 12:06 PM Report abuse +2 rate up rate down Reply
Hello Carol


LEE RRESOLUTION has the right idea. The rest of the commentators here are just are at each other's throats. STAY WITH THE SUBJECT MATTER. "MR" Obama is just doing what he's supposed to do. He has holes in is hands and his feet and is just reacting as the strings are being manipulated. "HE" has no plan, only those that are given to him. Whatever he does is only going to benefit Wall Street. Oh by the way, "MR" Bush answered to the same strings.
Get some guts Americans. Understand that we have the best professional politicians money can buy and let's find a way to get rid of them.

February 14 2011 at 12:05 PM Report abuse +1 rate up rate down Reply

We're were these fiscal hawks when the bush-cheney gang was looting the country?

February 14 2011 at 11:49 AM Report abuse -2 rate up rate down Reply
1 reply to varealest's comment
LEE Resolution



Clueless and silly.

February 14 2011 at 11:36 AM Report abuse +4 rate up rate down Reply
1 reply to LEE Resolution's comment
LEE Resolution


You're just not relevant . You add nothing .

February 14 2011 at 11:33 AM Report abuse +3 rate up rate down Reply
2 replies to LEE Resolution's comment

to Michaelgesq blah blah you sound like a democrat tell me why the government has any business in buying ones home, seems to me when they started sticking their noses into the mortage business is when the trouble started. Also why is the government supposed to support the lower class why is the goverment supposed to support any one we are supposed to be responsible for our selves this idea that the government is supposed to take care of you is stupid it will be the ruin of US we were the land of opportunity until the government made you believe you couldn't make it without them . also yor remark about minority do you mean Black is it really?I know plenty of "minorities" that are respected members of their communities and have relied on their charater not whined about how hard it is to get anything done because I'm black or hispanic etc even whites are minorities in some comunities What have you done to make your home town a better place? these politicions are not looking out for you only how much power they can have over you (us)enough with the D&R bull you say let them do their job that would be nice istead of trying to do what individuals should be doing for them selves

February 14 2011 at 11:31 AM Report abuse +5 rate up rate down Reply
1 reply to emc01830's comment
LEE Resolution

EPA could go; HEW, HHS, and several other cabinet positions. These cabinet positions also serve no useful purpose. They don't educate, advance health and certainly don't advance welfare. Totally useless.

February 14 2011 at 11:31 AM Report abuse +5 rate up rate down Reply
1 reply to LEE Resolution's comment
LEE Resolution

Fannie Mae and Freddie Mac have descended into an affirmative action hot bed of corruption and graft, with no clue as to what they're really there for. Not a tough decision to make. Fire them all and lock the place up. It would be used as a warehouse or an office building (not government).

February 14 2011 at 11:27 AM Report abuse +4 rate up rate down Reply