The Treasury released its long-awaited housing finance policy report Friday morning. Leaks suggested that the Obama administration would essentially punt on the question of what to do about the government's role in the mortgage market. That assessment was a little too strong. Instead, the plan did provide three options, but all were variations on a clear theme: the government's role in the housing market will be sharply reduced once a new policy is adopted.
The report (.pdf) begins with a narrative of how the government's involvement in the housing market played a role in the financial crisis. It stressed how the public-private nature of government-sponsored enterprises Fannie Mae and Freddie Mac was intrinsically flawed. It then asserted that these GSEs should be wound down over the next decade or so. This much is clear: under every option the Treasury outlines, Fannie and Freddie will eventually cease to exist.
With that said, however, the government's presence in the housing market will not disappear entirely. In fact, it would certainly remain intact for the affordable housing initiatives through the Federal Housing Authority and other targeted programs, as it had in the past. The big change would be how mortgage funding would be provided for the vast majority of mortgages in the U.S., which have heavily relied on Fannie and Freddie for decades. The Treasury wants the private market to step in and take on most of that funding responsibility and relieve taxpayers of some or almost all of the mortgage market's risk.
Before getting into the three alternative policy possibilities that it offers, the plan explains how the mortgage market would be weaned off of Fannie and Freddie over a period of time. One change would be to gradually increase the guarantee fees that the GSEs charge, so that private guarantors would be able to better compete. Another change would be to require Fannie and Freddie to obtain more private capital to cover subsequent credit losses. The Treasury also intends to reduce the size of mortgages that qualify for Fannie and Freddie guarantees. Finally, the administration intends to wind down Fannie's and Freddie's mortgage portfolios, by at least 10% per year.
The Treasury also provides some guidance on mortgage underwriting and measures to crack down on predatory lending. Perhaps the most surprising assertion was that loans that obtain government backing going forward -- excluding those in designated programs specifically targeting lower-income borrowers -- should eventually be required to "have at least a ten percent down payment." The Treasury also stressed the importance of ensuring borrowers have the ability to pay the mortgages they obtain.
Finally, the plan provided three alternatives to how the government's role in housing finance policy should proceed going forward. The three proposals would all provide government support for programs to help to lower-income borrowers secure housing, as has traditionally been done through the FHA, USDA, and Veterans' Affairs assistance program. These would make up about 10-15% of the mortgage market. So the three alternatives would impact the other 85% of mortgages.
Here's the big surprise: under all three alternatives, the government would have a much smaller presence than it did through Fannie and Freddie prior to the financial crisis. Here's a brief description of each summary: