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Administration Expected to Propose Controlled End to Fannie, Freddie

The industry is abuzz with news that the federal government could unveil its proposal for overhauling ""Fannie Mae"":http://www.fanniemae.com and ""Freddie Mac"":http://www.freddiemac.com as early as Friday.

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The ""_Wall Street Journal's_ Nick Timiraos"":http://online.wsj.com/article/SB10001424052748703989504576128403630694340.html, citing ""people familiar with the matter,"" says the Obama administration will recommend phasing out the nation's two largest housing-finance companies and gradually reducing the government's footprint in the mortgage market.

Fannie and Freddie haven't had a profitable quarter in over three and a half years. With the housing and mortgage markets reeling after the housing bubble burst, the two companies were placed under the federal government's control in September 2008 in order to avert their collapse. Since then, Treasury has pumped more than $150 billion of taxpayer dollars into the two GSEs and cries for their reform have grown louder.

It's hard for anyone to argue against the fact that Fannie and Freddie have become the bastions of today's fragile housing market, filling in the void when private lenders began to pull back on lending. Today, the two GSEs have a

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hand in 90 percent of all new mortgage originations. According to a ""_Bloomberg BusinessWeek_ report"":http://www.businessweek.com/news/2011-01-21/fannie-freddie-s-24-billion-glut-imperils-recovery.html, they also hold $24 billion in foreclosed homes â€" a combined REO inventory that has quadrupled over the past three years to nearly 242,000 properties.

""_Reuters_ says"":http://www.reuters.com/article/2011/02/08/us-usa-housing-idUSTRE70R80420110208 the government's revamp will give the private sector a dominant role in the housing market and reduce the government's support to below 50 percent within five to seven years after the plan is adopted.

The news agency says sources familiar with the housing-finance reform package explained that the White House is considering shrinking Fannie Mae and Freddie Mac's $1.5 trillion mortgage portfolios over the next 10 years. _Reuters_ says the ""Federal Housing Administration"":http://www.fha.gov is also in line for some changes, which could include raising the cost of loans backed by the federal mortgage insurer.

The administration's proposal is expected to lay out three recommendations for the future face of the nation's housing finance system.

According to a ""_Bloomberg_ report"":http://www.bloomberg.com/news/2011-02-09/fannie-mae-freddie-mac-could-be-phased-out-under-treasury-s-housing-plan.html, one option is likely to be a complete government withdrawal from the mortgage-guarantee business now dominated by the GSEs.

_Bloomberg_ says a second option would phase out the government's guarantee of mortgage-backed securities (MBS) and put private firms in the driver's seat, with the government stepping in only in the event of a market failure, while the third option would be a far less dramatic reduction of government support that more closely resembles the current system.

Treasury representatives did not immediately return requests for comment on the forthcoming proposal. The Department has declined all media inquiries on the matter since the plan has not yet been made public.

About Author: Carrie Bay

Carrie Bay is a freelance writer for DS News and its sister publication MReport. She served as online editor for DSNews.com from 2008 through 2011. Prior to joining DS News and the Five Star organization, she managed public relations, marketing, and media relations initiatives for several B2B companies in the financial services, technology, and telecommunications industries. She also wrote for retail and nonprofit organizations upon graduating from Texas A&M University with degrees in journalism and English.
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