Gov't Seeks Smaller Role For Fannie, Freddie

Published February 21, 2012 6:18PM (EST)

WASHINGTON (AP) — The government regulator for Fannie Mae and Freddie Mac has submitted a plan to Congress that would shrink the mortgage giants' role in the housing market.

The Federal Housing Finance Agency's proposal for a leaner Fannie and Freddie was released Tuesday and would mean fewer mortgages are backed by the government. That could make buying a home more expensive because it would lead to higher interest rates.

Under the plan, Fannie and Freddie could also increase its prices to guarantee loans and establish agreements with private investors to take on added credit risk.

The Obama administration last year laid out three options to wind down the government's support for the mortgage market slowly. Rather than making a single recommendation, the administration left the decision to Congress.

Fannie and Freddie buy mortgage loans from primary lenders, pool them, and sell them with a guarantee that investors will be paid even if borrowers default. The agencies have helped people buy homes at affordable interest rates.

But the two nearly collapsed in 2008, after the subprime mortgage market collapsed and defaults and foreclosures piled up. The government seized them in September 2008.

The bailouts of Fannie and Freddie have so far cost taxpayers roughly $150 billion, and that figure continues to grow. 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.

Since they were taken over by the government, Fannie and Freddie have bought or guaranteed about 3 out of every 4 mortgages in the United States and more than 10 million Americans have refinanced Fannie- and Freddie-backed mortgages.

By Salon Staff

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