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The Obama administration laid out three broad options Friday for reducing the government's role in the mortgage market. All three would almost certainly lead to higher interest rates and costs for borrowers.
The administration said in a report that the government should withdraw its support for the mortgage market slowly, over five years or more. The report describes a path for winding down the troubled mortgage giants Fannie Mae and Freddie Mac.
But rather than making a single recommendation, the administration offered Congress three scenarios and will let lawmakers shape the final policy.
The options are:
-- No government role, except for existing agencies like the Federal Housing Administration.
-- A government guarantee of private mortgages triggered only when the market is in trouble.
-- Government insurance for a targeted range of mortgage investments that already are guaranteed by private insurers. The government guarantee would kick in only if those private companies couldn't pay.
The private sector will assume a greater role in housing finance under all of the options. The government currently owns or guarantees more than 90 percent of new mortgages.
"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 bailouts of Fannie and Freddie have cost taxpayers nearly $150 billion. Republicans have called for Fannie and Freddie to be abolished, and have largely blamed the two for leading the country into the 2008 financial crisis.
But there is a growing recognition that drastic action would upend the housing finance system, threatening the broader economy.
The report comes after years of debate about how to end the government's role in housing. The options have been discussed for years as well.
By handing the decision to Congress, the administration sidesteps one of the most complex and politically explosive questions facing the financial system. Any of the three options will almost certainly cause mortgage rates to rise.
Treasury Secretary Timothy Geithner said the Obama administration needed to defer to Congress on a final decision to avoid having a "monopoly on ideas." He said the housing industry was years away from recovery and that it would take five to seven years to dissolve Fannie and Freddie.
"We're going to drive West without knowing where we're going," Geithner said. "Somewhere around Salt Lake City, we'll have to make a choice."
A near-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.
However, all three options maintain some level of government support, either through guarantees or through existing agencies,such as the Federal Housing Administration.
Administration officials said the proposals will end the hybrid model of public-private companies that left the public on the hook for billions when Fannie and Freddie failed.
The housing finance system should guarantee access to affordable housing for Americans who can afford it, they said. To that end, any plan would increase support for rental housing, add safeguards for people in rural and underserved areas and preserve FHA loans for low- and moderate-income borrowers.
The report, issued jointly by the Treasury Department and the Department of Housing and Urban Development, suggests several short-term measures that would effectively increase the cost of taking out a government-backed mortgage. Other financing options would become more competitive, drawing private dollars back into the market.
These include reducing the maximum size of mortgages purchased by Fannie and Freddie by more than $100,000, to $625,000, by October. The companies would require 10-percent downpayments for all loans. And the fee for the government guarantee would increase.
Geithner said the plan to dissolve Fannie and Freddie would proceed "very carefully," and promised that the companies would have the cash they need to meet their existing obligations.
"We think there's very broad consensus on the Hill and in the broader private market that there needs to be a transition to a much smaller role for the government," he said.
The plan calls for changes beyond the government's massive support for mortgage finance. For example, it says there should be national standards for the companies that collect borrowers' monthly payments. Those companies, known as mortgage servicers, admitted last year to foreclosing on borrowers without filing the required legal papers.