Officials say the reform measures will shrink the governmentÃ¢â‚¬â„¢s footprint in the mortgage market, fix Ã¢â‚¬Å“fundamental flawsÃ¢â‚¬Â in the system, increase transparency for investors, and improve underwriting and mortgage servicing standards.
On a conference call with the media, Treasury Secretary Timothy Geithner stressed that Ã¢â‚¬Å“realistically, this is going to take five to seven yearsÃ¢â‚¬Â for full reform to be implemented.
HUD Secretary Shaun Donovan added, however, that there are short term steps that don't require legislation, which can and need to be taken immediately to return private capital to the market.
Ã¢â‚¬Å“We are going to start the process of reform now, but we are going to do it responsibly and carefully so that we support the recovery and the process of repair of the housing market,Ã¢â‚¬Â Geithner said.
The first item on the administrationÃ¢â‚¬â„¢s laundry list of reform measures is phasing out the nationÃ¢â‚¬â„¢s two largest mortgage companies. With the financial crisis, private capital retreated from the housing market, leaving the government to guarantee more than nine out of every 10 new mortgages. Both Geithner and Donovan underscored the fact that the plan for winding down Fannie and Freddie is centered on returning private capital to the market.
The private sector must fill in the receding role of the government and Ã¢â‚¬Å“should be the primary source of mortgage credit and bear the burden for losses,Ã¢â‚¬Â according to a Treasury statement.
The administration recommends ending what it called Ã¢â‚¬Å“unfair capital advantages that Fannie Mae and Freddie Mac previously enjoyedÃ¢â‚¬Â by requiring them to price their guarantees as though they were held to the same capital standards as private lenders. Although the pace of increasing guarantee fees will depend largely on market conditions, the administration says it wants to bring Fannie and Freddie to a level playing field with the private market Ã¢â‚¬Å“over the next several years.Ã¢â‚¬Â
The administration is also recommending Congress allow the temporary increase in conforming loan limits to reset as scheduled on October 1, 2011. The limits for GSE loans, as well as for the Federal Housing Administration (FHA), were raised to $729,000 to allow for greater market support. Unless Congress extends the temporary increase, the limit will revert back to $625,500 in the fall.
The report also advocates a 10 percent down payment requirement for any mortgage than Fannie Mae and Freddie Mac guarantee. The proposal suggests a Ã¢â‚¬Å“gradual increasing,Ã¢â‚¬Â but does not set a target date for hitting the 10 percent mark.
In addition, the administrationÃ¢â‚¬â„¢s plan calls for scaling back Fannie Mae and Freddie MacÃ¢â‚¬â„¢s investment portfolio at an annual rate of no less than 10 percent per year.
Ã¢â‚¬Å“We believe that under our current Preferred Stock Purchase Agreements, there is sufficient funding to ensure the orderly and deliberate wind down of Fannie Mae and Freddie Mac,Ã¢â‚¬Â the administration said in its report.
While much attention has been centered on what will become of Fannie and Freddie, the proposal covers many elements of the housing finance system beyond the GSEs, including FHA, which currently accounts for about a third of the mortgage market.
The report recommends increasing FHAÃ¢â‚¬â„¢s annual mortgage insurance premium by 25 basis points Ã¢â‚¬" a change the administration wants to see go into effect in April.
Additionally, the plan will help provide targeted support to creditworthy but underserved families that want to own their own home, as well as affordable rental options.
In the report, officials note that Ã¢â‚¬Å“[a]ny responsible reform effort that addresses the flaws in the pre-crisis housing market will make credit less easily available than before the crisis.Ã¢â‚¬Â
For months now, economists have been debating the governmentÃ¢â‚¬â„¢s decades-long push to provide the American Dream of homeownership to every citizen and whether or not that modus operandi served to fuel the housing bubble and lax lending standards that put so many borrowers into unsustainable mortgages.
Donovan stressed that the government must ensure a Ã¢â‚¬Å“better balance of homeownership and renting.Ã¢â‚¬Â He said the proposal includes measures that would expand FHAÃ¢â‚¬â„¢s capacity to support financing of affordable rental and multifamily housing.
The administration is also throwing its weight behind several immediate and near-term reforms to correct problems in mortgage servicing and foreclosure processing. These include:
* Putting in place national standards for mortgage servicing;
* Reforming servicing compensation to ensure servicers have proper incentives to help borrowers avoid foreclosure;
* Requiring that mortgage documents disclose the presence of second liens and define the process for modifying a second lien; and
* Allowing primary mortgage holders to restrict additional debt secured by the same property.
Beyond the administration's specific recommendations, the report also puts forward three longer-term reform choices, ranging from a government role that is limited to just the FHA, to an FDIC-type insurance guarantee for certain mortgage securities. We cover these three options in more detail in a separate article on DSNews.com
The administration's proposal has been delivered to Congress. Donovan says the options outlined in the report should Ã¢â‚¬Å“deepen debate and dialogueÃ¢â‚¬Â among lawmakers as they decide the best route to take to move forward. A copy of the full 32-page report can be accessed here