World Crisis Online

The Obama administration has announced a government retreat from the housing market, potentially pushing up the cost of mortgages and ending the decades-old push for ever greater home ownership.

Proposals in a white paper released on Friday would wind down Fannie Mae and Freddie Mac, the government-sponsored enterprises that have received billions of dollars of taxpayer money to prevent their failure. With other government programmes, they now support more than 90 per cent of the mortgage market.

“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 Tim Geithner, US Treasury secretary.

But it punts most of the important decisions to Congress, where a Republican-controlled House of Representatives has constantly chided Democrats for their failure to deal with the GSEs.

On Friday, several key Republicans signalled that an end to the bitter war of words over the GSEs might be in sight, mainly because the proposed overhaul satisfies their calls for scrapping Fannie and Freddie.

“I’m encouraged to see the administration included a number of reform ideas that track closely with my own,” said Scott Garrett, head of a House financial services committee panel overseeing housing finance. “I think we can all agree the status quo is unsustainable and housing finance reform in the United States is way overdue.”

A senior administration official said that the GSE model, much criticised for giving rewards to shareholders and executives in good times and laying a heavy burden on taxpayers during the crisis, was dead. “Absolutely, the government did too much, and what it did, it did quite poorly,” Mr Geithner later told a Brookings Institution conference.

Ed Royce, a Republican member of the House financial services committee, said he was “pleasantly surprised that the administration came out in favour of winding down the two government sponsored enterprises”.

But he added: “The 800-pound gorilla in the room remains the level of government support in the mortgage market going forward. On that front they decided to punt and offer three options. The time for debating the merits of options has long passed. Now is the time to act.”

Instead of a mammoth quasi-government entity that buys mortgages from banks and securitises and guarantees them, the government would have a much smaller role in each of three options presented in the white paper.

In the first option, the government’s role would be limited to the Federal Housing Administration, which provides access to mortgage credit for poorer borrowers.

In the second, the government would also maintain a guarantee over mortgages but priced to the banks at a higher level so it would only be competitive in the absence of a functioning private market.

In the third, the government would be a last-resort insurer of the market, paying out to holders of mortgage securities only in a “catastrophic” downturn in which private insurers were wiped out.

The official said the transition to whichever proposal was chosen by Congress could take five to seven years, but this year the GSEs should start to pull back from the mortgage market by reducing the limit on the size of loans that they back and increasing further the guarantee fee that they charge mortgage providers.

The white paper acknowledges that in all options, except perhaps the final one, mortgage borrowers face a higher cost of credit. The much-vaunted 30-year-fixed mortgage, unusual compared with other countries, is also under threat.

The proposals in effect end the policy of successive White Houses of trying to get more Americans to buy their own home – a policy that reached its apex in the administrations of Bill Clinton and George W. Bush.

While analysts said the white paper was a step in the right direction, some criticised it for being short on specifics and unrealistic in some of its expectations.

“The White House pushed the hard decisions down the road, and that means this will be settled in Congress,” said Mark Oesterle, a former senior Republican aide to the Senate banking committee.

Chris Whalen of Institutional Risk Analytics said that it was “childish” to talk about the return of private capital to the mortgage market at a time when the only loans being underwritten are for those with government guarantees.

And Lawrence Yun, the chief economist for the National Association of Realtors, said the White House report understated the risks of any move that would further concentrate the role in the mortgage market played by the largest US banks.

“This is the start of a long marathon,” Mr. Yun said. “Many things are up for discussion.”