Mortgage Reform: What it Means for YOU

Today the White House is set to release its "White Paper," outlining plans to restructure mortgage giants Fannie Mae and Freddie Mac. The goal is to reduce the government's role in the two beleaguered institutions.

Before you dance on the graves of Fannie and Freddie, here's a quick overview:

What's the White House trying to do?

The Administration wants to play a smaller role in the mortgage market--right now, over 90 percent of loans flow through Fannie and Freddie, to the tune of approximately $1.5 trillion worth of mortgage debt. And sadly, the wind-down makes no mention of a payback of the nearly $150 billion taxpayers pumped into Fannie and Freddie during the height of the financial crisis in September, 2008.

How can Uncle Sam reduce his involvement in the mortgage market?
The essence of the plan would transfer government participation in the mortgage market to the private sector -- here are three potential ways:

Cut all government ties and let the private sector take over: The government could let old loans mature and cease involvement on anything new
Become a "lender of last resort": Under this model, the government would only step in during times of crisis
Taper off government involvement: This scenario could involve a number of changes to the existing system, including: lower maximum loan limits (current limit on a conforming loan is $417,000 and a jumbo is up to $729,500 in higher priced markets. The jumbo limit is set to decrease to $625,500 in September and the government could let that happen); force buyers to put down more money as a down payment; and beef up Fannie and Freddie's balance sheets by increasing fees.

I think #3 is most likely, but given the current environment in Washington, who knows?

What Does This Mean for YOU?
I hate to burst everyone's bubble, but the government's exit from the giant mortgage market could raise the cost and availability of mortgages for consumers. I don't think this means that the 30-year mortgage is going away, but reform will impose a significant change in the home buying landscape. So while you may like the idea of Uncle Sam's reduced involvement in the mortgage market, or the demise of Fannie and Freddie, it could come at a steep price.

This morning, I talked about the current state of the housing market with CBS2, including: higher mortgage rates, the White House plan, and the coming wave of foreclosures

More on MoneyWatch:
What the Fannie Mae and Freddie Mac Proposals Mean for Mortgage Costs

Jill Schlesinger

Jill Schlesinger, CFP® is the Emmy-nominated Business Analyst for CBS News. She covers the economy, markets, investing and anything else with a dollar sign on TV, radio (including her nationally syndicated radio show), the web and her blog, "Jill on Money." Prior to her second career at CBS, Jill spent 14 years as the co-owner and Chief Investment Officer for an independent investment advisory firm. She began her career as a self-employed options trader on the Commodities Exchange of New York, following her graduation from Brown University.

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