Mortgage Market Plan

In February, the President and his administration unveiled a plan that would, over time, wind down and eliminate both Fannie Mae and Freddie Mac. Although this idea is not entirely new, it stands out in the option outlined by Tim Geithner (Treasury Secretary), which envisions a housing-finance system that depends almost completely on the private sector.

Since the 1980's, the government has had many failed attempts at helping people buy homes, resulting in about half a trillion dollars shelled out by taxpayers to recoup losses. This has happened (and continues to happen) because the government is never adequately compensated for its assumed risk.

This is the situation that occurred in the early 90's with Fannie and Freddie when affordable housing requirements were extended that forced Fannie and Freddie to extend their funding to borrowers who couldn't meet prime loan standards. Eventually higher loan limits allowed Fannie and Freddie to purchase mortgages for high-end homes, which, ultimately, benefited both low and high income borrowers from their funding.

The taxpayers were stuck with the bill, for what resulted in housing bubble crises and no considerable improvement in the country's home ownership rate.

The President's proposal essentially argues that the country can build a healthy mortgage system without the public financial burden by ensuring that mortgages are mostly prime loans.

Prime loans are desirable as investments that will be purchased by a number of financial institutions without the government's backing. And, most people looking for new homes are already eligible for prime mortgages at about 85% (based on credit scores of 660 or above).

This still leaves the opportunity for borrowers with low incomes to benefit from social programs, although the program would have to operate to also protect the public from excessive loss.

Securities regulation should function to ensure good quality mortgages. With Fannie and Freddie's mortgage sizes being gradually reduced, or by raising their guarantee fees, other options become available to service the markets from which they have withdrawn.