3 mortgage-crisis strategies

WASHINGTON - Homebuyers will face potentially higher interest rates under any of three Obama administration options for reducing government support of the mortgage market, the price of ending the country's dependence on financially teetering housing-finance giants Fannie Mae and Freddie Mac.

The Treasury Department is scheduled to release a report today that lays out the three choices for winding down Fannie and Freddie and moving to a more privatized mortgage market, according to a number of people familiar with the administration's approach.

The 20- to 25-page report will not endorse any of the options, a decision by the administration designed to provoke a discussion about the role of government in housing finance without roiling the housing market or locking President Barack Obama into a particular solution.


The report's scenarios are:

• No government role except for existing agencies like the Federal Housing Administration.

• A government role that explicitly guarantees mortgages only when the market is in trouble.

• A government role at all times, although not through government-supported entities like Fannie and Freddie.

"Under any of the scenarios, there's going to need to be more private capital in the housing system," said Michael Barr, who recently left his post as assistant Treasury secretary to return to teaching at Michigan University Law School. "That's going to mean more pressure on interest rates."

The greater the government involvement, the milder the impact on borrowing costs. But more government involvement also places more taxpayer money at risk.

A complete withdrawal by the government probably would end the popular 30-year fixed-rate mortgage or, at least, make it more expensive. Banks would prefer adjustable-rate mortgages that would fluctuate with the markets.

Mark Zandi, an economist who has advised Democrats and Republicans, proposed the middle-of-the-road option of giving the government a role that insures mortgages only in catastrophic market conditions.

That type of insurance would be paid for by homeowners, he said, and it "would keep rates measurably lower, allow mortgage credit and would preserve the 30-year, fixed-rate mortgage."

The report comes as Republicans and Democrats struggle to find a way to repair the financing system for the nation's $11 trillion housing market. The report is designed to have a soft landing on Capitol Hill.

by Jim Kuhnhenn Associated Press Feb. 11, 2011 12:00 AM




3 mortgage-crisis strategies