U.S. Treasury Secretary Timothy F. Geithner presented Congress with a set of options for weaning the $11 trillion mortgage market from its dependence on the government, while calling for changes to be phased in “responsibly and carefully” to avoid economic disruptions.
The report delivered today by Geithner and Housing and Urban Development Secretary Shaun Donovan presents three approaches for a future housing finance system. It also calls for the government to shrink “and ultimately wind down” Fannie Mae and Freddie Mac, the bailed-out government-sponsored enterprise companies that helped fuel the housing bubble before being felled by investments in subprime mortgages.
“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,” Geithner said in a statement accompanying the report. The report also pledges ongoing U.S. government support to make sure Fannie and Freddie can meet any debt or other financial obligations.
The plan doesn’t endorse a particular long-term option or offer legislation. All three proposals would accompany an end of taxpayer support for Fannie Mae and Freddie Mac, which together have drawn more than $150 billion from the Treasury since they were seized by the government in September 2008.
In Congress, the report’s release is the opening bell for a political and policy bout over how to fix the mortgage-finance system, a debate that is likely to last months or years. Real estate brokers and developers have told lawmakers that the housing market dominated by Fannie Mae and Freddie Mac remains too fragile to survive a precipitous overhaul.
— Big banks that are willing to invest in mortgages
The proposed reforms will likely help the bank industry, especially larger firms, by allowing them to raise the prices that they charge consumers for mortgages, analyst Paul Miller of FBR Capital Markets [FBCM 3.775 0.025 (+0.67%) ] said.
— Mortgage securitizers
Wall Street firms have said record low interest rates and government competition have been a major factor keeping them out of the mortgage credit market. But reducing the government's role can be a "game changer," Martin Hughes, chief executive officer of Redwood Trust [RWT 16.41 0.06 (+0.37%) ], said at a securitization conference this week.
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"Why isn't the private sector up and running? It really is uber-government support for mortgage financing," said Hughes, whose real estate investment trust profits by taking on the riskier parts of private securitizations.
Wall Street investment firms have been rebuilding mortgage finance desks since 2009. Other non-bank entities such as PennyMac Mortgage Investment Trust [PMT 18.00 -0.18 (-0.99%) ], asset manager BlackRock [BLK 202.47 1.76 (+0.88%) ] and private equity firm WL Ross & Co. have laid foundations for private lending in recent months.
But after the housing crisis, many investors are still reluctant to load up on mortgage-backed securities that don't have a government guarantee linked to them. It could take years for faith in securitization to return to prior levels.
— Mortgage insurers
Private mortgage insurance backstops home loans where the buyers make a down payment smaller than 20 percent of the purchase price. Buyers pay for it but the insurance protects the lender's interests.
Insurers collectively face potential claims on hundreds of thousands of delinquent mortgages from the last few years, but could be reinvigorated if they get the opportunity to write large amounts of new business in years to come.
The end of Fannie and Freddie is expected to bolster top industry players MGIC Investment [MTG 10.13 0.96 (+10.47%) ], Radian Group [RDN 8.01 0.93 (+13.14%) ], PMI Group [PMI 3.35 0.10 (+3.08%) ] and Genworth Financial [GNW 13.575 0.555 (+4.26%) ]. Shares of all four surged on Friday.
The biggest losers in the Obama administration's reform proposals will inevitably be people seeking to buy a home, or people that own homes.
Treasury Secretary Timothy Geithner conceded on Friday that mortgage costs will rise in coming years, as government support is withdrawn and the private sector takes on a bigger role.
The ultimate shape of the reforms is far from clear, however, and no one is able to say exactly how the changes will translate into bottom-line costs for homebuyers.
Credit Suisse [CS 42.87 -0.40 (-0.92%) ] speculated this week that rates on a basic 30-year fixed mortgage could rise as much as 2 percentage points if the government withdrew its backing of Fannie Mae and Freddie Mac.
Higher mortgage rates could make homes less affordable for buyers, and could also weigh on home prices, hurting sellers.
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— Banks that sell mortgages to investors rather than holding them
Smaller banks that have traditionally sold most of their mortgages to Fannie and Freddie have less ability to hold large mortgage portfolios on their balance sheets, and are more likely to suffer from the proposals, FBR's Miller said.
Banks that operate as agents and have traditionally sold most of their mortgages to the GSEs or private investors, such as Bank of America [BAC 14.835 0.345 (+2.38%) ] are also expected to have to adjust their business models as a result of the proposals.
— Wall Street
In the near term, Fannie and Freddie's demise could hurt the Wall Street firms that help sell their bonds and hedge their interest-rate risk. As two of the most regular issuers in the country, the government-sponsored enterprises were a steady source of fees for a roster of major investment banks.
In the long-term, these issues could be more than offset by the banks' profits from securitization and higher mortgage rates, which is why many big banks for years have been lobbying for the government to decrease its support for Fannie Mae and Freddie Mac.
NEW YORK -- The Obama administration plans to wind down bailed-out Fannie Mae and Freddie Mac over the next five to seven years, Treasury Secretary Timothy Geithner said Friday.
The taxpayer-owned mortgage giants, which were effectively nationalized in 2008, guarantee nine of every 10 new mortgages along with other government agencies. Delinquencies on home loans backed by the two companies have cost taxpayers more than $150 billion.
The troubled housing market, and the key role sour mortgages played in causing the financial crisis, has led to calls for the federal government to radically reform the way home mortgages are financed. The role of the government in funding those mortgages must also be altered, policy makers, bankers and investors say. Administration officials have vowed to reform the market. In a report delivered today to Congress, the administration outlined its goals for the future of housing finance, and three broad options for legislators to pursue.
The first option calls for a private system in which lenders and investors fund new mortgages, with a limited role for existing federal agencies to subsidize home loans for the poor and other special groups, like veterans.
The second proposal calls for much of the same, but it includes a government backstop for mortgages during times of market stress. If the market froze, the government would step in and guarantee home loans.
In the third option, the administration outlined a much broader government role. Under this alternative, taxpayers would insure securities backed by home loans.