What's The Future For Fannie, Freddie, and Your Home Mortgage?

Last Updated Aug 17, 2010 7:48 PM EDT

The Federal government will continue to support housing in the future, but that support may be smaller than it was in years past, according to top Obama Administration officials. Their remarks came at a Treasury Department summit today on housing finance, convened as new data was released showing continued weakness in housing starts, building permits, and builder confidence.

The Commerce Department reported that housing starts were up 1.7 percent in July, a figure that the Wall Street Journal said was better than expected, but that Reuters and other news organizations found to be disappointing. The other figure released at the same time -- a drop in new building permits to a 14-month low -- was seen as universally disappointing. A day earlier, the National Association of Home Builders said its monthly index of builder sentiment dropped in August to its lowest reading in 17 months.

At issue now are the futures of Freddie Mac (the Federal Home Loan Mortgage Corp.) and Fannie Mae (the Federal National Mortgage Association), the two mortgage-backing behemoths that have been in federal conservatorship since the credit crisis imploded in 2008. Since then, taxpayers have spent $145-billion to keep the two buying, packaging and reselling mortgages; the Congressional Budget Office says they could cost $389 billion over the next decade if they continue to operate as they are now.

That's not going to happen, according to both Treasury Secretary Timothy Geithner and Housing and Urban Development Secretary Shaun Donovan. "We will not support a return to the system where private gains are subsidized by taxpayer losses," Geithner said in remarks prepared for the conference, though he did present a strong case for the government continuing to have some role in supporting the housing finance market. "The government's footprint in the housing market needs to be smaller than it is today," said Donovan said.

But what will that footprint look like? A few thoughts.
  • Don't expect anything very soon. The Obama Administration is still doing research and doesn't expect to propose any changes to housing finance until January. By then a new (presumably more Republican?) Congress will be in place, so there may be a greater predisposition then by lawmakers to limit government intervention in home finance.
  • Mortgage standards could improve. Most people agree that it was a bad idea for Fannie and Freddie to be buying and packaging the awful mortgages that drove the housing bubble. I'm talking about those interest-only, 100 percent loan-to-value, no-doc, variable rate loans. Yuck! Lawmakers can be expected to limit the kinds of mortgages the government-supported finance companies will enable.
  • Focus could shift to low-income housing. Fannie and Freddie now will cover mortgages as large as $417,000 for single family homes, all over the country and as high as $729,750 in high cost areas. Should they? Some in Washington think that if the government is involved, it should focus on subsidizing low-income housing, and not helping upper-middle income folks move up to bigger and fancier homes. Donovan has said that federal housing subsidies should include renters as well as homeowners.
  • The tax deduction could get pulled into the discussion. You know that fat writeoff you get for your mortgage interest every month? It's widely popular and normally considered a third rail in American politics; you can't touch that. But with deficits, tax legislation, and a review of the government's role in housing finance all on the table at the same time, anything can happen.
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