Who Steps Up in Mortgages After Fannie, Freddie?

Treasury Secretary Timothy Geithner and Housing and Urban Development Secretary Shaun Donovan on Feb. 11 offered three options for shrinking Fannie Mae (FNMA) and Freddie Mac (FMCC), the bailed-out housing finance companies that own or guarantee more than half the nation's mortgage debt. By gradually reducing the dominant positions of Fannie and Freddie, the officials hope to coax private financial firms and bond traders to take on more of the U.S. mortgage market's risk and revive the secondary market for home loans. One government misstep, and a shortage of home loan money could send loan costs soaring and home prices tumbling. "We want to be careful that the process happens in a way that doesn't interfere with or impede the process of repair in the housing market," Geithner said.

The first option laid out by the Administration would limit government backing to loans for narrowly targeted groups of borrowers such as lower-income families, veterans, and rural residents. This option is likely to push up interest rates and make the traditional 30-year fixed-rate mortgage hard to obtain, the report said. The second option would build on the first by adding an emergency government backstop that would ramp up in times of financial crisis. The third imagines the biggest government role through a reinsurance program for a broad class of mortgage-backed bonds in which the U.S. would come to the rescue if a primary insurer failed.