Curious Capitalist

Will Obama’s Plan for Fannie and Freddie Crater Housing?

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Treasury Secretary Tim Geithner plans a reduced role for government in home finance market (Jason Reed/REUTERS)

Two years on from the government takeover of Fannie Mae and Freddie Mac, Washington wants out of the housing business. Tomorrow, the Obama administration is going to recommend slowly phasing out the government’s role in the mortgage market, and who can blame them? Housing prices are still falling, foreclosures are rising, and there’s so much inventory on the market that experts like Yale economist Robert Shiller say its going to take four or five years for prices to stabilize.

The question is, will the private sector really be able to fill government shoes?

Washington has been responsible for 9 out of every 10 new home loans in the last year. Meanwhile, banks have been sitting on their bailout cash, too spooked to doll it out in an economic recovery that still seems precarious.

What does this mean for consumers? In the short term, nothing good. If the government steps out of the mortgage market, borrowing costs are likely going to rise. But that doesn’t mean it’s not a prudent idea. The announcement tomorrow will likely include some lowering of the maximum loan limits for mortgages, which can run more than $700,000 in top markets. It’s tough to argue that Uncle Sam should still be bailing out people who live in McMansions. Likewise, you’ll probably see Fannie and Freddie start to raise their fees, which could make private lending a bit more competitive. Also, not a bad thing.

One thing you won’t hear about tomorrow, but something that is ever more important, is what the government plans to do about urban planning in the future. One of the little known facts of the housing crisis is that the communities that lost the most value in the housing crash were those that had the least linkages to public transportation. Think giant urban sprawl areas like Las Vegas and parts of California. In the wake of the mortgage market fiasco, HUD, the Housing and Urban Development agency, has plans to try to encourage more public transport links and density in cities, which could not only create value in the housing market, but help save energy too. Smart thinking given that 60 percent of Americans now spend 12 percent of their income on it.