Less Government in Obama’s Housing Reform, Plans to Strengthen FHA

Obama’s housing plan, released today, outlines a future for housing finance where the private sector will stand to gain market share abandoned by Fannie Mae and Freddie Mac and government will have a substantially smaller role. The plan includes reforms to the mortgage market including stronger consumer protection, increased transparency for investors, improved underwriting standards and other measures.

“This is a plan for fundamental reform–to wind down the GSEs, strengthen consumer protection, and preserve access to affordable housing for people who need it,” said Treasury Secretary Tim Geithner. “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.”

Among the plan’s key steps is to “wind down” Fannie Mae and Freddie Mac and work toward bringing private capital back to the housing market, and to reform and strengthen the Federal Housing Administration.

This includes ensuring that creditworthy borrowers with incomes up to the median level for their area have access to affordable mortgages, in a way that is healthy for FHA’s long-term finances, including considering options such as lowering the maximum loan-to-value ratios for qualifying mortgages and adjusting pricing, the report states.

It also recommends allowing the present increase in FHA conforming loan limits to expire on October 1, 2011, as scheduled, after which it will explore further reductions. The reduction would likely bring the loan limit for FHA reverse mortgages down from $625,500 to $417,000. The administration will also implement a 25 basis point increase in the price of FHA’s annual mortgage insurance premium, as detailed in the Obama’s 2012 Budget.

In order to reduce the involvement of Fannie and Freddie, the report recommends diminishing their investment portfolios by at least 10% per year.

“Throughout the transition, we remain committed to ensuring that Fannie Mae and Freddie Mac have sufficient capital to perform under any guarantees issued now or in the future and the ability to meet any of their debt obligations,” the report states. “This assurance is essential to continued economic stability.”

The administration said it recognizes the important role of Fannie Mae and Freddie Mac and their employees, and says it looks forward to continuing to work with them in the long-term reform process.

The Mortgage Bankers Association, in response to the report, noted a 2009 MBA proposal and how it fits in with the housing plan. “Our proposal envisions an explicit, but limited, government guarantee of lower-risk mortgage-backed securities. The guarantee would be paid for by fees used to build a fund to protect taxpayers,” said MBA Chairman Michael Berman. “We continue to believe that this is the most prudent approach, one that places the primary risk on private investors and ensures sufficient liquidity during times of economic stress in order to provide affordable mortgage finance in all types of mortgage markets. Our proposal directly addresses the problems that caused the failure of the Fannie Mae/Freddie Mac system.”

View the full report to Congress.

Written by Elizabeth Ecker

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