WASHINGTON — The Obama administration on Friday released its long-awaited proposal for overhauling the mortgage market, calling for gradually shutting down bailed-out mortgage giants Fannie Mae and Freddie Mac and reducing the government's now-huge role in housing finance.
The 32-page plan calls for phasing in an increase in the down payment requirement for loans guaranteed by Fannie and Freddie to 10 percent, while reducing the maximum size of mortgages they can back — a move that would affect areas with high property values.
During the financial crisis, Congress boosted the limit on such loans to as much as $729,750. The administration said it supports letting the limit drop back to $625,500 as scheduled on Oct. 1.
The plan also calls for increasing mortgage fees to encourage more private investment while winding down the huge investment portfolios of Fannie and Freddie — whose bailouts have cost $150 billion so far — by at least 10 percent a year as the entities are slowly put out of business.
But demonstrating the complexity of pulling back government support from a still-fragile housing market, the plan drafted by the Treasury and Housing and Urban Development departments offers Congress three options for long-term restructuring.
"This is a plan for fundamental reform of the housing market, but I want to emphasize we're going to proceed on this path of reform very carefully," Treasury Secretary Timothy Geithner told reporters. He said the plan would take five to seven years to enact.
Fannie and Freddie own or guarantee more than half of all U.S. mortgages and have become vital players in the $11 trillion mortgage market.
The three options are:
* Scaling back the government's role but continuing a limited government guarantee mechanism for mortgages;
* A greater pullback that would have the government step in with guarantees largely only during a recession, providing an "emergency backstop" to mortgages to keep the housing market from collapsing;
* Limiting the government's role in the market to supporting only low-income buyers through the Federal Housing Administration.
"All three of those options would amount to a fundamental change in the way our housing finance markets operate, and they would all have the virtue of not leaving us vulnerable to the kind of risks we faced in this housing crisis," Geithner said.
But the report is unlikely to satisfy many Republicans, who blame Fannie and Freddie for creating the housing bubble that triggered the financial crisis, and have criticized the Obama administration for not moving quicker to end the bailouts of the firms.
Those critics want Fannie and Freddie, which are 80 percent owned by the taxpayers, shut down much faster and the government to get completely out of the housing finance market, letting private capital take its place.
"For too long, Fannie Mae and Freddie Mac have been allowed to run wild at great financial expense to American taxpayers," said Rep. Scott Garrett, R-N.J., who heads the House subcommittee overseeing the entities. "Already on the hook for $150 billion and counting, the American people are fed up with the ongoing bailout of these failed institutions. The most important thing we can do right now — this very instant — is end the bailout and protect taxpayers from further losses."
But many in the banking and housing industry said the government needs to maintain some role in housing finance, particularly during times of crisis when lenders wouldn't want to issue any new mortgages. The report specifically rules out a complete government pullout from the market.
"This is a clear and comprehensive plan ... that would ensure that Americans continue to have access to a reasonably priced, stable source of financing while reducing taxpayer risk and the risk of a crisis," said HUD Secretary Shaun Donovan.
He said the loans being guaranteed by Fannie and Freddie since the 2008 government seizure have been issued under higher standards and are projected to be profitable. Therefore, he said, there's no rush to start a government pullout that could harm the housing recovery, which would drive up the costs of the bailouts linked to bad subprime loans made before the government takeover.
"If we were to take a step that precipitously shocked the market, pushed the market into a double dip ... we could see increased costs for the taxpayer," Donovan said.