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Debate heats up on rebuilding U.S. mortgage system

By Alan Zibel
AP Real Estate Writer

Washington — Lawmakers are starting to wrestle with how to replace Fannie Mae and Freddie Mac, the mortgage giants that nearly collapsed at the start of the financial meltdown.

In September 2008, the government seized control of Fannie and Freddie — massive companies that buy home loans, package them into investments and guarantee them against default. Since then, the government has pumped a combined $126 billion into the companies to keep them afloat.

House lawmakers on Tuesday took tentative steps toward figuring out what to do next, holding their first hearing about how to restructure the mortgage system in the wake of the financial crisis. For the time being, the market is still resting on three government pillars: Fannie, Freddie and the Federal Housing Administration.

Last year, the two companies backed about 70 percent of all home loans, according to Inside Mortgage Finance, a trade publication. Fannie and Freddie also manage the Obama administration’s $75 billion loan modification program.

Rep. Barney Frank, chairman of the House Financial Services Committee, said there is consensus about replacing Fannie and Freddie, but little agreement on what should take their place.

“You can’t really tear down the old jail until you’ve built a new one,” said Frank, who traded barbs with Republicans about who deserved more blame for the collapse of Fannie and Freddie.

Since the government took over Fannie and Freddie, Obama officials have given few details on their long-term thinking. In the meantime, officials plan to seek public comment on a list of questions to be published next month.

Treasury Secretary Timothy Geithner said it should take several months to develop the administration’s plan.

But Republicans are impatient. They argued that the government’s push to expand homeownership through Fannie and Freddie was the main cause of the financial crisis and they want the government to unwind their investment as soon as possible.

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