FHFA Proposes New Strategy for Fannie and Freddie

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Agency seeks housing stability while decreasing government involvement.

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Fannie Mae and Freddie Mac will enter “a new phase of conservatorship” to minimize their role in the housing finance market, according to a strategic report sent to Congress by the Federal Housing Finance Agency (FHFA).

Since 2008, the FHFA has managed Fannie and Freddie in conservatorship. The relationship between the FHA and these two government-sponsored enterprises (GSEs) arose out of the federal government’s response to the financial crisis, which has already cost more than $180 billion in taxpayer support.

The FHFA’s report signals a strategic shift in its relationship with the GSEs, with the stated purpose being to move the conservatorships closer to an end.  FHFA’s initial strategy was characterized by crisis management, focusing on mitigating taxpayer losses and offering prospective and existing mortgage holders access to financing options to curtail foreclosures. The new plan lays out three main goals: shrinking Fannie and Freddie’s presence in the market, building a new infrastructure for the secondary mortgage market, and maintaining foreclosure prevention activities.

Winding down the GSEs’ direct involvement in the mortgage market would primarily occur by raising the fees charged to borrowers. Increasing the cost of borrowing from the GSEs would by comparison make private lenders more attractive to potential borrowers.

The report notes that indirectly reducing GSEs presence by increasing fees charged to borrowers would create less impairment in the still-recovering housing market because “simply shutting down the Enterprises would drive up interest rates and limit mortgage availability.”

The plan also pledges to lay the groundwork for a new secondary market that would bundle, buy, and sell home loans to investors. Other programs that attempt to lessen the pain of the foreclosure crisis for American homeowners would be continued as well.

The FHFA plan has so far received several positive responses on Capitol Hill, but could conflict with calls from the Obama administration and state officials who want Fannie and Freddie to respond to the foreclosure crisis more aggressively.