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Obama Budget May Tackle Housing Reform

Stocks in this article: BAC WFC JPM FNMA

Besides the mortgage interest deduction, the budget proposal could also have other important implications for mortgage finance.

Will FHA Draw From Treasury?

The budget will likely provide an updated estimate on the Federal Housing Administration's financial health. The agency said late last year that it is likely to have a $16.3 billion shortfall in its reserve fund and that it may have to request the Treasury for funds for the first time in its history.

The recovering housing market may have reduced the projected shortfall, but only marginally.

The FHA has been hiking its premiums and tightening lending standards to reduce the projected shortfall, but there is now a bipartisan effort to overhaul the agency, which some say is only one recession away from a bailout. The FHA has up to Sept. 30 to determine if it needs to draw funds from the Treasury.

The government's refinance and mortgage modification programs are due to expire at the end of 2013. The refinancing program has received a lift in the past year after changes announced in late 2011, while the modification program is still short of the Administration's targets.

Still, with more than 10 million homeowners still underwater, the government is under pressure to continue its mortgage aid. Any proposal to extend the programs will be welcome news for both borrowers and will also benefit banks such as Wells Fargo (WFC), JPMorgan Chase (JPM) and Bank of America (BAC) that have big mortgage businesses.

Will Fannie, Freddie Repay Treasury?

Finally, there is the gargantuan problem of what to do with housing finance giants Fannie Mae (FNMA) and Freddie Mac (FMCC) that are still in conservatorship. Granted, the budget is not going to tackle this controversial question, but the fact that the agencies have returned to profit and may be in a position to repay the government has obvious implications for the taxpayer.

Currently all of Fannie Mae and Freddie Mac's profits go to the Treasury, but they count as dividends rather than a repayment of bailout money. Until the government decides what to do with Fannie and Freddie, the Treasury can milk the billions in dollars it gets from the agencies.

Some investors are betting that the housing giants will soon repay the government and have money left for shareholders.

That idea disregards political reality, according to some analysts, since neither party has any desire to return the agencies back to their private form.

The budget proposal may contain some language that allows for private capital to return to the mortgage market, such as further increases in the agencies' guarantee fees and charting a path towards sharing credit risk.

-- Written by Shanthi Bharatwaj in New York.

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