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ProSense Donating Member (1000+ posts) Send PM | Profile | Ignore Fri Feb-11-11 09:38 AM
Original message
Edited on Fri Feb-11-11 09:39 AM by ProSense

Obama Administration Plan Provides Path Forward for Reforming Americas Housing Finance Market, Winding down Fannie Mae and Freddie Mac

Reforms Will Shrink the Governments Footprint in Housing Finance on a Responsible Timeline, Help Protect Taxpayers

Plan Includes Critical Measures to Help Fix the Fundamental Flaws in the Mortgage Market, Better Target Governments Support for Affordable Housing

WASHINGTON Today, the Obama Administration delivered a report to Congress that provides a path forward for reforming Americas housing finance market. The Administrations plan will wind down Fannie Mae and Freddie Mac and shrink the government's current footprint in housing finance on a responsible timeline. The plan also lays out reforms to continue fixing the fundamental flaws in the mortgage market through stronger consumer protection, increased transparency for investors, improved underwriting standards, and other critical measures. Additionally, it will help provide targeted and transparent support to creditworthy but underserved families that want to own their own home, as well as affordable rental options.

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 Treasury Secretary Tim Geithner. 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.

This report provides a strong plan to fix the fundamental flaws in the mortgage market and better target the governments support for affordable homeownership and rental housing, said Housing and Urban Development Secretary Shaun Donovan. We must continue to take the necessary steps to ensure that Americans have access to quality housing they can afford. This involves rebalancing our housing priorities to support a range of affordable options, from promoting much-needed financing for quality, affordable rental homes to ensuring the availability of safe, and sustainable mortgage products for current and future homeowners.

The Obama Administration's reform plan will:

1. Wind Down Fannie Mae and Freddie Mac and Help Bring Private Capital Back to the Market. In the wake of the financial crisis, private capital retreated from the housing market and has not yet returned, leaving the government to guarantee more than nine out of every 10 new mortgages. That assistance has been essential to stabilizing the housing market. However, the Obama Administration believes that, under normal market conditions, the private sector subject to stronger oversight and standards for consumer and investor protection should be the primary source of mortgage credit and bear the burden for losses.

The report recommends using a combination of policy levers to wind down Fannie Mae and Freddie Mac, shrink the governments footprint in housing finance, and help bring private capital back to the mortgage market. The Obama Administration is committed to proceeding with great care as we work toward the objective of ensuring that government support is withdrawn at a responsible pace that does not undermine the economic recovery.

Phasing in Increased Pricing at Fannie Mae and Freddie Mac to Make Room for Private Capital, Level the Playing Field. The Administration recommends ending unfair capital advantages that Fannie Mae and Freddie Mac previously enjoyed by requiring them to price their guarantees as though they were held to the same capital standards as private banks or financial institutions. This will help level the playing field for the private sector to take back market share. Although the pace of these increases will depend significantly on market conditions, the Administration recommends bringing Fannie Mae and Freddie Mac to a level even with the private market over the next several years.

Reducing Conforming Loan Limits. To further reduce Fannie Mae and Freddie Macs presence in the market, the Administration recommends that Congress allow the temporary increase in those firms conforming loan limits (the maximum size of a loan those firms can guarantee) to reset as scheduled on October 1, 2011 to the levels set in the Housing and Economic Recovery Act (HERA). We will work with Congress on additional changes to conforming limits going forward.

Phasing in 10 Percent Down Payment Requirement: To help further protect taxpayers, we recommend requiring larger down payments from borrowers. Going forward, we support gradually increasing required down payments so that any mortgage that Fannie Mae and Freddie Mac guarantee eventually has at least a 10 percent down payment.

Winding Down Fannie Mae and Freddie Macs Investment Portfolios: The Administrations plan calls for continuing to wind down Fannie Mae and Freddie Macs investment portfolio at an annual rate of no less than 10 percent per year.

Returning Federal Housing Administration (FHA) to its Traditional Role. As Fannie Mae and Freddie Macs presence in the market shrinks, we will encourage program changes at FHA to ensure that the private sector not FHA picks up this new market share. The Administration recommends that Congress allow the present increase in FHA conforming loan limits to expire as scheduled on October 1, 2011, after which it will explore further reductions. The Administration will also put in place a 25 basis point increase in the price of FHAs annual mortgage insurance premium, as detailed in the Presidents 2012 Budget.

Throughout the transition, we remain committed to ensuring that Fannie Mae and Freddie Mac have sufficient capital to perform under any guarantees issued now or in the future and the ability to meet any of their debt obligations. This assurance is essential to continued economic stability.

We recognize the critically important role that Fannie Mae and Freddie Mac and their employees have played in the housing finance market while they have operated in conservatorship. We look forward to continuing to work with them to find ways to develop and implement the longer term reform solutions that the Administration determines together with Congress.

2. Fix the Fundamental Flaws in the Mortgage Market. The Obama Administration is committed to fixing the fundamental flaws in the housing finance chain. That process is already underway as we move to fundamentally transform the mortgage market through the Dodd-Frank Wall Street Reform and Consumer Protection Acts (Dodd-Frank Acts) critical reforms. Implementing these key measures, as well as additional reforms outlined in this report, will help to strengthen the long-term health of the mortgage market for borrowers, lenders, and investors.

Helping Consumers Avoid Unfair Practices and Make Informed Decisions About Mortgages: The Administration will continue to implement the Dodd-Frank Acts reforms to strengthen anti-predatory lending protections, improve underwriting standards, require lenders to verify a borrowers ability to pay, and provide increased mortgage disclosures for consumers.

Increasing Accountability and Transparency in the Securitization Process: The Administration is currently working on rules to require originators and securitizers to keep greater skin in the game and to align incentives across the
securitization chain. Dodd-Frank charged the SEC with setting stricter disclosure requirements so that investors can more easily understand the underlying risks of securities, and establishing an Office of Credit Ratings to more effectively regulate the credit rating agencies.

Creating a More Stable Mortgage Market: The Administration supports stronger capital standards to help ensure that banks can better withstand future downturns, declines in home prices and other sudden shocks, without jeopardizing the health of the economy. Additionally, the comprehensive reforms undertaken pursuant to the Dodd-Frank Act to constrain excessive risk in the financial system, including strengthened and coordinated oversight through the Financial Stability Oversight Council (FSOC), will help build a healthier and more stable mortgage market for the long term.

Servicing and Foreclosure Processes: The Administration supports several immediate and near-term reforms to correct problems in mortgage servicing and foreclosure processing to better serve both homeowners and investors. These include putting in place national standards for mortgage servicing; reforming servicing compensation to help ensure servicers have proper incentives to invest the time and effort necessary to work with borrowers to avoid default or foreclosure; requiring that mortgage documents disclose the presence of second liens and define the process for modifying a second lien in the event the first lien becomes delinquent; and considering options for allowing primary mortgage holders to restrict, in certain circumstances, additional debt secured by the same property.

Forming a New Task Force on Coordinating and Consolidating Existing Housing Finance Agencies: Following on the Presidents call in the State of the Union to reform government to build a stronger future, the Administration will create a task force to explore ways in which the Department of Housing and Urban Development, the Department of Agriculture, and the Department of Veterans Affairs housing finance programs can be better coordinated, or even consolidated.

3. Better Target the Government's Support for Affordable Housing. The Administration believes that we must continue to help ensure that Americans have access to quality housing they can afford. This does not mean, however, that our goal is for all Americans to become homeowners. Instead, we should make sure opportunities are available for all Americans who have the credit history, financial capacity, and desire to own a home have the opportunity to take that step. At the same time, we should ensure that there are a range of affordable options for the millions of Americans who rent, whether they do so by choice or financial necessity. Moving forward, we must design access and affordability policies that are better targeted and focused on providing support that is financially sustainable for families and communities. The Administration recommends initially focusing our efforts on four primary areas:

Reforming and Strengthening the FHA: We will continue to ensure that creditworthy borrowers who have incomes up to the median level for their area have access to affordable mortgages, but we will do so in a way that is healthy for FHAs long-term finances, including considering options such as lowering the maximum loan-to-value ratios for qualifying mortgages and adjusting pricing.

Rebalancing our Housing policy and Strengthening Support for Affordable Rental Housing: The plan advocates additional support for rental housing through measures that could include expanding the FHAs capacity to support lending to the multifamily market, with reforms like risk sharing with private lenders and dedicated programs for hard to reach property segments like smaller properties.

Ensuring that Capital is Available to Credit-worthy Borrowers in All Communities, Including Rural Areas, Economically Distressed Regions, and Low-income Communities: The plan calls for greater transparency by requiring securitizers to disclose information on the credit, geographic, and demographic characteristics of the loans they package into securities. The Administration will explore other measures to make sure that secondary market participants are providing capital to all communities in ways that reflect activity in the private market, consistent with their obligations of safety and soundness.

Supporting a Dedicated Funding Source for Targeted Access and Affordability Initiatives: The plan calls for a dedicated, budget neutral, financing mechanism to support homeownership and rental housing objectives. The Administration will work with Congress on developing this funding mechanism going forward.

4. Longer-Term Reform Choices. The report also puts forward longer-term reform choices for structuring the governments future role in the housing market. Each of these options would produce a market where the private sector plays the dominant role in providing mortgage credit and bears the burden for losses, but each also has unique advantages and disadvantages that we must consider carefully.

Deciding the best way forward will require an honest discussion with Congress and other stakeholders about the appropriate role of government over the longer term. The Obama Administration looks forward to working to build consensus, on a bipartisan basis, with a wide range of stakeholders on this issue.

To read the Obama Administration's report on the future of housing finance, please visit, link.

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GoCubsGo Donating Member (1000+ posts) Send PM | Profile | Ignore Fri Feb-11-11 09:46 AM
Response to Original message
1. At least he has a plan.
Can't say that about Boner, McConnell, et al. I'm not an expert at finance, so I don't know if this is a good plan or not. But, at least he's trying to do something other than focusing on far less pressing issues, like abortion. Thanks for posting that.
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LiberalEsto Donating Member (1000+ posts) Send PM | Profile | Ignore Fri Feb-11-11 09:50 AM
Response to Reply #1
2. I fear it will leave consumers at the "mercy"
of the private banking industry. It's another step in dismantling FDR's New Deal.

I'm not defending Fannie or Freddie. Heaven knows they were looted from inside for years by greedy officials with virtually no accountability. But I think to protect consumers, we need some kind of federal regulation over the mortgage industry.
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ProSense Donating Member (1000+ posts) Send PM | Profile | Ignore Fri Feb-11-11 09:54 AM
Response to Reply #1
3. Read:
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midnight Donating Member (1000+ posts) Send PM | Profile | Ignore Fri Feb-11-11 10:04 AM
Response to Original message
4. Neoliberalism means privatization.... Freddie and Fannie
were destroyed via private bankers and now the plan is to gut them and give private bankers more control... Bad Bad Plan.

"The FCIC's recent report illustrated an important lesson from the economic meltdown: Privatization, not big government, ruined Fannie Mae and Freddie Mac. Running a government program like a private corporation leads to the worst excesses of executive self-indulgence. Fannie and Freddie didn't bring down the economy, as some have claimed, but they were destroyed by the same privatize-and-deregulate philosophy that led to the crisis.
Now we're learning that Washington may be preparing to take that destructive philosophy even further. Proposals to "reform" Fannie and Freddie by privatizing them even more aren't just bad, dangerous ideas. Worse, they suggest that we're returning to the blind and mistaken ideologies of the past. If that's true, then it's only a matter of time until the next meltdown comes."

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ProSense Donating Member (1000+ posts) Send PM | Profile | Ignore Fri Feb-11-11 10:12 AM
Response to Reply #4
5. That is not the plan.
That snip is focused on the part of the plan that will shrink the programs back to their original size. Privatization turned them into large out-of-control entities that did nothing but funnel money to financial institutions. Add to that the fact that the CEOs of those agencies were earning tens of millions each year.

The new agency will operate with the security and strength of the FDIC: Obama housing paper includes gov't insurance fund

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MannyGoldstein Donating Member (1000+ posts) Send PM | Profile | Ignore Fri Feb-11-11 10:42 AM
Response to Original message
6. We need to give the President the benefit of the doubt here
Let's hope it works as well for bankers as has HFA and HAMP mortgage modification programs. This would further increase yacht sales, which are a source of jobs.
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ProSense Donating Member (1000+ posts) Send PM | Profile | Ignore Fri Feb-11-11 10:46 AM
Response to Original message
7. "This was an unanticipated consequence of their privatization. "


It is true that pay at Fannie and Freddie used to be even more criminogenic. According to the Los Angeles Times:

In 2007, then-Freddie Mac CEO Richard F. Syron had a base salary of $1.2 million and total compensation of $18.3 million, according to SEC filings. In the same year, Daniel Mudd, the chief executive of Fannie Mae, had a base salary of $987,000 and total compensation of $11.7 million.

Those were the days, when you could in a single year be made wealthy for destroying a company and causing scores of billions of dollars of losses to the taxpayers. The title of Akerlof & Romer's famous 1993 article has never looked more prescient -- "Looting: the Economic Underworld of Bankruptcy for Profit."


The proverbial bottom line is that a global search for talent, after Fannie and Freddie's second descent into accounting control fraud bankrupted both firms, Fannie and Freddie (with its regulators' blessing, chose Witherell. (Heidrick & Struggles, which describes itself as the leading executive search firm, issued a press release praising itself for finding Witherell.) When Obama knew he had to clean up the Stygian Stables that were Fannie and Freddie -- knew that their senior managers and their regulators had failed catastrophically -- he left in charge the failed regulatory leadership team. The regulator team allowed Freddie to select as its COO one of the leaders in the creation of the liar's loans that were the greatest single contributor to Freddie's failure and the financial crisis. This was bizarre politics -- the senior regulator Obama left in power until his voluntary resignation was a Republican chosen because he was George Bush's close friend since their days together in prep school. It was even more insane regulatory policy.


Fannie and Freddie have no need to pay these high salaries to senior managers. It was the perverse executive compensation that drove the accounting control frauds at Fannie and Freddie -- as the SEC explicitly charged. Executive compensation created the perverse managerial incentives that destroyed Fannie and Freddie. This was an unanticipated consequence of their privatization. Because Fannie and Freddie were privatized, their officers designed their compensation system in the same perverse manner as most firms (Bebchuk & Fried 2004). The mangers stood to gain enormous compensation if they inflated short-term accounting income, and as Akerlof & Romer famously observed, accounting fraud is a "sure thing." Mr. Raines explained in response to a media question what was causing the repeated scandals at elite financial institutions:


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Dawgs Donating Member (1000+ posts) Send PM | Profile | Ignore Fri Feb-11-11 11:10 AM
Response to Original message
8. Too little, too late.
And who the fuck can afford 10% down when 30% of homeowners are underwater?
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ProSense Donating Member (1000+ posts) Send PM | Profile | Ignore Fri Feb-11-11 11:11 AM
Response to Reply #8
9. Always. n/t
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Dawgs Donating Member (1000+ posts) Send PM | Profile | Ignore Fri Feb-11-11 11:18 AM
Response to Reply #9
10. Not Always. n/t
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ProSense Donating Member (1000+ posts) Send PM | Profile | Ignore Fri Feb-11-11 11:19 AM
Response to Original message
11. "The firms do not lend directly to homebuyers, but buy mortgages..."
Fannie Mae and Freddie Mac could be wound down


But he added: "We can't wait too long. It's important Congress legislates some time over the next two years."

Fannie Mae was founded in 1938 at a time when millions of families could not become homeowners, or faced losing their homes, because of a lack of mortgage funds. It was a government agency until 1968.

Freddie Mac was created in 1970 to provide competition to Fannie Mae.

The firms do not lend directly to homebuyers, but buy mortgages from approved lenders and then sell them on to investors.

The path to corruption was set in motion a long time ago.

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ProSense Donating Member (1000+ posts) Send PM | Profile | Ignore Fri Feb-11-11 01:30 PM
Response to Original message
12. National Community Reinvestment Coalition statement
National Community Reinvestment Coalition

Washington, DC -- The following is a statement from John Taylor, President & CEO of the National Community Reinvestment Coalition (NCRC), on the Administration's plan for Fannie Mae and Freddie Mac:

"The only measure for the success of this plan is whether or not all creditworthy borrowers have the opportunity to purchase a home. If working class families are locked out of homeownership, and we end up with a housing finance system that serves only the well-heeled, then we will have failed miserably.

"Historically, working class people have had access to private sector capital in order to purchase a home, with guarantees by the government to ensure affordability. The Administration's plan, by emphasis and omission, suggests that this country's commitment to ensuring homeownership for working families will be lessened.

"Allowing the market to wash its hands of serving lower income people would be detrimental to the economic well-being of communities. If the government becomes the sole provider of housing finance to lower income communities, we will have created a dual marketplace. Separate is not equal, and I fear that this will beckon the return of redlining and discrimination by private financial institutions.

"As with any major plan, the devil is in the details. The plan contains some measures that would target the government's involvement in the mortgage market, cutting out effective subsidies for wealthier individuals by limiting loan sizes, targeting guarantees and other incentives. But we need to see more explicit mechanisms to ensure that the private market has a duty to ensure that creditworthy working and blue-collar people have access to capital, otherwise this plan is not viable.

"The plan presents a range of options; all will have a major impact on the system of housing finance as we know it. Options #1 and #2 would dramatically reduce credit availability for working families. Option #3 shows promise, but the impact on working class communities will be determined by what range of mortgage securities receive a guarantee backed by the government.

"If Congress and the Administration successfully tailor the guarantee to mortgage securities that meet the capital needs of low- and moderate-income and rural communities, then that would keep the private sector in the business of ensuring access to capital in these communities.

"There is universal agreement with the principle that people who cannot afford homeownership shouldn't be put in an unsustainable loan. However, the Administration's proposal may be overly narrowing the window of opportunity for many blue collar and low- and moderate-income people from realizing their dream of homeownership. We appreciate the Administration's efforts to address the critical need for expanded affordable rental housing.

Reform is desperately needed.

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