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Government May Stay Involved in the Housing Market After All

Stocks in this article: FNMA FMCC XHB XLF

NEW YORK ( TheStreet) -- A bipartisan report on housing released Monday called for continued involvement of the government in the mortgage market even as it wants greater private participation.

The Bipartisan Policy Center's Housing Commission -- headed by former U.S. Senators George Mitchell, a Democrat, Republicans Christopher Bond and Mel Martinez and former Housing and Urban Development Secretary Henry Cisneros -- is proposing winding down Fannie Mae (FNMA) and Freddie Mac (FMCC) and replacing it with a "public guarantor."

"While private capital must play a greater role in the housing finance system, continued government involvement is essential to ensuring that mortgages remain available and affordable to qualified homebuyers," the report said.

The public guarantor, unlike Fannie and Freddie, would not buy or sell mortgages or issue mortgage-backed securities. Rather, it will guarantee timely payment of principal and interest on securities, a model similar to Ginnie Mae, the government agency that guarantees securities backed by government agencies including the Federal Housing Administration and the Department of Veteran Affairs.

The "limited catastrophic guarantee" would be triggered only after "all private capital ahead of it has been exhausted."

The guarantee also will be "explicit" and fully paid for through premium collections that exceed expected claims.

The commission proposes winding down Fannie and Freddie after a multiyear transition period. The report recommends that the Federal Housing Finance Agency, the conservator of the GSEs, to continue letting them raise fees and gradually lower loan limits to allow larger loans to flow to private capital.

The current GSE limits are $417,000 in most areas and $625,500 in high-cost locations.

The report also noted the various obstacles that restrict mortgage credit, including overly tight standards, fear of putback risk, demand for multiple appraisals and the use of distressed properties as a basis for market comparisons.

It says the Treasury should be directed to develop a plan to align various regulatory requirements as much as possible to help get mortgage credit flowing again.

The report also includes recommendations for affordable renting, rural housing and solutions for an aging population.

-- Written by Shanthi Bharatwaj in New York

>To contact the writer of this article, click here: Shanthi Bharatwaj.

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Disclosure: TheStreet's editorial policy prohibits staff editors and reporters from holding positions in any individual stocks.

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