Mortgage Monday: Are Fannie Mae and Freddie Mac On The Way Out?

Are Fannie Mae and Freddie Mac On Their Way Out?

The Federal Government is looking to get out of the two mortgage giants or at least reduce its role in them. Their plan is a long-awaited overhaul of the mortgage market and calls for gradually shutting down Fannie and Freddie. Fannie and Freddie own or guarantee more than half of the mortgages in the U.S. and are the main players in the $11,000,000,000 ($11 trillion) mortgage market.

The 32-page-plan calls for phasing in an increase of 10% in the down-payment requirement for loans guaranteed by Fannie and Freddie, and reducing the maximum size of mortgages they will back.

Congress boosted the limit on loans to as much as $729,750. The Obama administration supports letting the limit drop back to $625,500 which is scheduled for October 1, 2011.

There are three options for the government to consider. They are:

1. Scaling back the government’s role but continuing a limited government guarantee mechanism for mortgages. Specifics were not announced.

2. A greater pullback that would have the government step in with the guarantees largely only during a recession, which would provide an emergency backstop to mortgages to keep the housing market from collapsing.

3. Limiting the government’s role in the market to supporting only low-income buyers through the Federal Housing Administration.

The critics want Fannie and Freddie shut down and the government completely out of the housing finance market, letting private capital take its place. There is only one flaw with this: there is currently no private capital that would be able to assume the $11 trillion in mortgages that Fannie and Freddie currently own.

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