Our Terms of Service and Privacy Policy have changed.

By continuing to use this site, you are agreeing to the new Privacy Policy and Terms of Service.

Obama wants big changes in mortgages

By Ben Rooney, staff writer


NEW YORK (CNNMoney) -- The Obama administration on Friday officially unveiled its plan to remake the mortgage market and reduce the government's role in housing finance by winding down Fannie Mae and Freddie Mac.

The highly anticipated "white paper" outlines steps the administration says will help draw private capital back into the mortgage market, curb unfair lending practices and make federal support for borrowers more targeted.

The plan would phase in changes over a period of years and push back the most dramatic restructuring, which would require congressional approval, until as late as 2018. (Colin Barr: The long goodbye)

"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," Treasury Secretary Tim Geithner said in a statement.

Fannie and Freddie are government-sponsored enterprises that buy home loans that conform to certain standards and convert them into assets that can be sold to investors. They stand behind the vast majority of mortgages in the United States.

The two institutions, which were publicly traded at one time, were rescued by the government in 2008 as the downturn in the housing market led to staggering losses on bad loans. The two companies have received about $150 billion in taxpayer aid since then.

Three options for the long haul: The paper lays out three possible long-term solutions for restructuring the mortgage market after Fannie and Freddie are gone. These options will now frame the debate in Congress over how to proceed with more significant reforms.

Under one option, the government would only guarantee mortgages backed by the Federal Housing Administration and other programs for lower- and moderate income borrowers.

The other options also include backing of FHA loans, but propose additional steps to reform government support for the housing market.

One proposal would create a "backstop mechanism" to support the mortgage market during a crisis. The other focuses on providing insurance for mortgage-backed securities.

In a conference call with reporters, Geithner said it could take between five and seven years to wind down Fannie and Freddie and put in place a permanent solution.

Near-term changes: Meanwhile, the paper also outlines a number of steps the government can take now to begin overhauling the way Americans borrow money to buy a home.

The plan recommends requiring Fannie Mae and Freddie Mac to price their loan guarantees to the same standards as private banks.

It also says Congress should allow a temporary increase in those firms' conforming loan limits to expire. Currently, Fannie and Freddie are allowed to buy loans worth up to $729,000. If the increase expires on schedule in October, the limit would fall to $625,500.

In addition, the plan calls for gradually increasing down payments for loans backed by Fannie and Freddie and shrinking their loan portfolios.

The administration is also seeking to raise federal insurance premiums on mortgages. Obama's 2012 budget, which will be submitted to Congress on Monday, will include a proposal to raise federal insurance premium on FHA loans by 0.25%.

Critics argue that such steps will raise borrowing costs for homeowners and shock the housing market. But the administration maintains that gradual implementation of reforms will not disrupt the economy.

"We have to do this carefully and responsibly," said Shaun Donovan, secretary of Housing and Urban Development.

The paper also details steps to protect consumers from unfair mortgage practices and ensure that federal aid for low-income borrowers is more effective. To top of page

Index Last Change % Change
Dow 16,374.76 23.38 0.14%
Nasdaq 4,733.50 -16.48 -0.35%
S&P 500 1,951.13 2.27 0.12%
Treasuries 2.14 -0.03 -1.20%
Data as of 9:13am ET
Company Price Change % Change
Dow Chemical Co 42.83 0.44 1.04%
Xerox Corp 10.02 0.05 0.50%
Southwestern Energy ... 15.41 -0.26 -1.66%
Halliburton Co 38.08 -0.09 -0.24%
Twenty-First Century... 26.72 0.07 0.26%
Data as of Sep 3
Sponsors

Sections

The Force wasn't the only thing to awaken just after midnight on September 4. Cash registers sprang into life as fans flocked to buy new products tied to the latest Star Wars move. More

U.S. economy added only 173,000 jobs in August, only adding to the uncertainty surround a rate hike from the Federal Reserve. More

Apple could announce a new Apple TV, updated iPhones, and an iPad Pro at its big press event on Wednesday, September 9, in San Francisco More

The BauBax travel jacket, with 15 built-in features, needed $20,000 on Kickstarter, but got $9 million. More

Pimco's famous fund once managed by star manager Bill Gross has less than $100 billion in management for the first time since 2007. More