Whitehouse Plans to Dissolve Fannie Mae and Freddie Mac

The Obama administration is reducing the government's role in mortgages. They have made a proposal that will undo 70 years of previous federal policy aimed at getting Americans to buy homes. This proposal may also increase the expense of home loans all across the board.

The plan, rolled out by the Treasury Department on Friday, will slowly dissolve Fannie Mae and Freddie Mac. These two programs are government-sponsored and purchased mortgages during the 2008 housing slump to encourage more lending. Eventually these purchases had to be bailed out.

"It's clear the administration wants the private sector to take a more prominent role in the mortgage rates, and in order for that to happen, mortgage rates have to go up," said Thomas Lawler, a housing economist in Virginia.

Ever since the housing market slump started, there has been pressure on the government to do away with Fannie and Freddie. This could potentially reduce taxpayer exposure to risk. Fannie and Freddie own about half of all mortgages in the U.S. They participated in almost 90 percent of new mortgages over the past year.

Fannie and Freddie buy mortgages from primary lenders, lump them together, and sell them to investors with a guarantee that investors will be paid even if borrowers default. But in 2008, when so many for defaulting, they nearly collapsed. They have cost taxpayers almost $150 billion so far, and it could increase to $259 billion, the FHFA says.

Here is a summary of the proposals:

1. Limit the government role to helping poorer and middle-class borrowers through agencies like the Federal Housing Administration. The FHA provides insurance on mortgage loans. This means the government would step in to guarantee private mortgages during a severe economic downturn, but would provide limited support during normal times.
2. Give the government a role as an re-insurer of mortgages. The government would insure a specific range of mortgages that already are guaranteed by private insurers, making them a "reinsurance" broker to those financing companies. If the private insurers couldn't pay the owners of the mortgage investments, the government reinsurance would pay.
3. Prompt mortgage companies to pass along fees to borrowers. In this part lenders would have to pay fees, which would ordinarily drive rates higher. That would hopefully attract more private money and hold rates down.

If the changes are passed it would be felt by nearly everyone who applies for a mortgage. The upside to making housing a less attractive investment? People who can't afford houses would be less likely to buy them, and might rent instead and Bankers would presumably lend more carefully.

However, removing those buyers from the market could cause home prices to fall; which would help first-time buyers but hurt those who already own homes.

The Obama administration can take some steps immediately without Congress' approval. It could require bigger down payments for loans that get federal guarantees, bar Fannie and Freddie from buying mortgages that are too big, or increase the fees they charge.