White House plans to wind down Fannie Mae and Freddie Mac

Discussion in 'Economics' started by bearice, Feb 12, 2011.

  1. The U.S. government is set to wind down mortgage titans Fannie Mae and Freddie Mac as it tries to prevent a repeat of the sub-prime crisis.

    In a long-awaited white paper, Treasury Secretary Timothy Geithner unveiled three options to overhaul the country's $10.6trillion mortgage market, all of which would involve the gradual unwinding of the troubled institutions.

    And all would dramatically scale back government involvement in the housing system, which it has propped up - to the tune of $150billion - since 2008, making way for private financial firms.

    But critics warned the proposals could increase mortgage rates and discourage consumers who are already wary of getting back into the housing market, potentially weakening property prices.

    Mr Geithner said:'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.

    '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.'

    He estimated the slow withdrawal of federal support would take between five to seven years to complete.

    In the short term, the administration will require larger down payments - up to ten per cent from five per cent - on government-backed loans, increase fees for home loans and shrink Fannie and Freddie's mortgage portfolios by ten per cent each year.

    But the plans attracted criticism from Democrats and consumer groups alike, who say they will make it more difficult for Americans to buy their own home, a policy long-cherished by successive administrations.

    The Consumer Federation of America told the Washington Post the plan 'could threaten consumers' access to affordable mortgage credit ... shifting control of the mortgage market to Wall Street banks and investors whose previous missteps have already caused massive foreclosures and losses.

    Barry Zigas, the federation's director of housing policy, told the newspaper: '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.'

    Fannie Mae and Freddie Mac have been central to the U.S. housing market for decades, but they played a key role in the 2008 financial meltdown and were bailed out by then-president George W. Bush.

    Since then, they have cost the U.S. taxpayer around $150billion.

    But they still dominate the market, guaranteeing or owning nearly one in two U.S. mortgages.

    Together with the Federal Housing Administration, the two GSEs - government-sponsored enterprises - back 95 per cent of new mortgages.

    The most drastic of the three suggestions Geithner outlined on Friday is similar to a plan put forward by the Republicans.

    It would would privatise the mortgage market almost entirely, limiting government insurance and guarantees to the FHA - for first-time buyers - and other programs for middle-income borrowers.

    The second would create a federal scheme to insure mortgages in a crisis, and the third would include government reinsurance for some types of mortgages

    But any plan is likely to take at least two years to pass into law - particularly with elections looming in 2012 - and so Fannie and Freddie will limp along for now.

  2. LeeD


    These arganisations provide important services that are not easily replaced like guaranteeing repackaged mortgage obligations or providing student loans.

    The downside is these are private for-profit companies that are not directly controlled by the federal government. However, the general assumption is the federal government guarantess any obligations of Fannie Mae and Freddie Mac because of their role in implementing government initiatives.

    If Fannie Mae and Freddie Mac are orderly closed down, Fed is the close next.
  3. Every system comes to an end one day. Bearice will also end one day.
  4. Privatizing the secondary market for mortgages will drive rates and downpaymnet requirements through the roof. This will devestate home values.

    And yet it must be done...
  5. LeeD


    Prudent savers will win and people who leverage their personal budget through the roof will loose. In the last 20 years it has consistently been the other way round.
  6. Hopefully soon.

  7. most poor people can not get mortgage

    But most rich people do

    So essentially the us govt is helping the rich people to buy houses and deuct mortgage interest on them whereas poor can not even afford a downpayment

    US govt has to stop allowing deductions on mortg interest for houses over say $250K which is still high if you ask me.

    This is ridicilous and has to stop.