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  • Obama Administration’s Housing Plan Is a Step in the Right Direction 1 comment
    Feb 13, 2011 9:44 PM | about stocks: FNMA, FMCC
    On Friday the Obama Administration released its long-awaited plan to reform the housing market and one thing is clear – the government intends to significantly reduce its involvement in the mortgage industry. Specifically, the plan calls for the gradual unwinding of the Government-Sponsored Enterprises (GSEs), Fannie Mae and Freddie Mac. According to the report, these two agencies, along with Ginnie Mae and FHA, currently guarantee over 90% of all new mortgages being originated. While emphasizing the important role Fannie and Freddie have played in stabilizing the housing market, the Administration believes that ultimately private investors must reenter the mortgage market in order for it to properly function.
    Under normal market conditions, the essential components of housing finance – buying houses, lending money, determining how best to invest capital, and bearing credit risk – are fundamentally private sector activities. Although the government still has an important role to play in housing finance, private markets – subject to strong oversight and standards for consumer and investor protection – should be the primary source of mortgage credit and bear the burden for losses.

    At the same time, the report emphasizes the Administration’s belief that affordable housing is an issue of vital importance, and that low- and middle-income families must have access to housing in areas with good schools and good jobs. 
     
    The Administration is committed to ensuring creditworthy first-time homebuyers and families with modest incomes can access a mortgage.
     
    The report adds that this access does not have to be provided solely through homeownership alone, but can be addressed through rental options as well.
     
    In order to encourage the return of private capital to the mortgage markets, the Administration recommends increasing the guarantee fees that Fannie and Freddie pay to a level more in line with the price that private banks and financial institutions with similar levels of risk would pay. By taking away this pricing advantage, private institutions would be able to compete more effectively with the GSEs. Furthermore, the conforming loan limits would be reduced by allowing the temporary increase approved in 2008 to expire on October 1, 2011. In other words, the government would no longer be originating and insuring jumbo mortgages, allowing the private market to resume control of these larger mortgages. FHA would be held in check as Fannie and Freddie exited the market over time, so that it does not inhibit private capital sources from filling the void created by the unwinding of these institutions. 
     
    Overall, the Administration is definitely moving in the right direction with this plan. Although their recommendations may cause homeownership to suffer in the short-term, especially as mortgage rates are beginning to rise, it is critical that the government stop supporting the entire housing market. Taxpayers can not continue paying the bill and assuming most of the risks. Instead, the federal government’s focus should be on ensuring that affordable housing options exist for low- and middle-income families, as well as the stability and liquidity of the mortgage market. The recommendations offered by the Obama Administration are a good start for moving in that direction.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
    Themes: Housing Stocks: FNMA, FMCC
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  • shiripatel
    , contributor
    Comments (2) | Send Message
     
    With all due respect, I would like to disagree this thing coz I believe that mass refinancing is the one which can stop/reduce foreclosure as to a great extent without impacting much on the economy. Mostly the time when home owners bought the house is when the financing was in the range of 6-7% and now it is 3-4. So it can make a big difference on their montly checks. They did go thro the banks to refinance but banks are not willing/showing their unwillingness coz it hits their own profits.

     

    believe me, mass refinancing is the only one which can get the housing issue under control. But government is rigid not to think in that direction and circuling around the problem without hitting the nail on head.
    9 Sep 2011, 12:03 AM Reply Like
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