The Treasury and the Department of Housing and Development have finally come up with some straight talk regarding the mortgage system of the nation. The Obama Administration has finally gone on record to say that Fannie Mae and Freddie Mac should go out of the mortgage business. As per the Obama Administration's proposals, Fannie Mae and Freddie Mac should wind down within the next five to seven years.
How will it affect our lives?
It is not clear how such a move will affect our lives. Though it is a sensible move, no one is sure whether or not it will be enough to prevent taxpayers from having to bail out institutions who will back mortgages in the future. It should be noted that our financial services industry is used to taxpayers ride to the rescue when it gets into trouble.
There are some important groups which are lining up against significant reductions in the government's role in the mortgage industry. These include the likes of:
- Mortgage Bankers Association
- The Financial Services Roundtable
- The Center for American Progress
These three major institutions have recommended creating entities like Fannie Mae and Freddie Mae in order to guarantee mortgages.
It has been noted that The Mortgage Bankers Association has recommended the creation of "mortgage-credit guarantor entities" with the help of federal charters. It will be overseen by a federal regulator. Such entities will actually guarantee loans pooled into mortgage-backed securities similar to what Fannie and Freddie did. Some of these institutions could be owned by mortgage originators through a cooperative set-up.
However, will the taxpayers surely be ready to create new government-sponsored enterprises which might fail again later on? I don't think so. It will be better if the government becomes solely the home lender. In this way the private market could operate during good times and the government will be able to step in when the market froze up.