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Senate Debates Reducing Government Role in Mortgage Market

September 13, 2011 – In its 10th hearing on home finance reform, the Senate Banking Committee today discussed how to reduce the government’s role in the home mortgage industry.

The reform effort came from a plan presented to Congress by the Obama Administration in February that would reduce the government’s role in home loans. One of the main aspects of his plan was to reduce and eventually eliminate Fannie Mae and Freddie Mac, the two mortgage entities the federal government seized during the housing crisis of 2008.

“The Obama Administration believes that, under normal market conditions, the private sector – subject to stronger oversight and standards for consumer and investor protection – should be the primary source of mortgage credit and bear the burden for losses,” a February White House press release stated.

After three years of controlling the two companies, the government now backs nearly nine out of every 10 new mortgages.

Talks in the Senate today furthered this plan, with lawmakers agreeing that Fannie Mae and Freddie Mac must be downsized, but still debating what the scale of the government influence in subsidizing home finance should be.

“I firmly believe that we need to reform our housing finance system but I am concerned about the unintended consequences for our housing market and economy that could result if a government role is eliminated completely,” Senate Banking Committee Chairman Tim Johnson (D-South Dakota) said in his opening statement. “Returning to the housing system we had before the Great Depression would not be an optimal outcome.”

Johnson outlined concerns about eliminating the government role completely, stating that a lack of government regulation would likely increase interest rates and changes in the availability and character of 30-year fixed mortgages.

“The 30-year fixed rate mortgage would also likely take a different form and require substantial down payments and higher interest rates, restricting the number of borrowers to a small number compared to today,” Johnson said.

Although specific legislation regarding the housing reform plan has not yet reached either the House or Senate floor, the first action in reducing Fannie and Freddie’s presence will be on Oct. 1, when the Federal Housing Administration – which regulates the two companies –lowers its loan limits to pre-housing crisis levels.

Obama’s plan for housing finance reform also includes increasing consumer protection to fix fundamental flaws in the mortgage market, heightening transparency for investors and raising underwriting standards.


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