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Obama pitches plan to shut down Fannie and Freddie

Obama pitches plan to shut down Fannie and Freddie

U.S. President Barack Obama will outline a plan Tuesday that could see America exit the mortgage business by phasing out Fannie and Freddie and replacing them with a system in which the private sector is responsible for mortgage defaults.

In an afternoon speech in Phoenix, Ariz., one of the hardest hit housing markets during the recession, the U.S. president is expected to offer details on his plan.

It's centred on winding down the Federal National Mortgage Association (with the acronym FNMA or popularly known as Fannie Mae) and the Federal Home Loan Mortgage Corporation (known as Freddie Mac) two government-backed housing agencies which together have backstopped the entire American housing market for the better part of the last half-century.

The two agencies function much like the CMHC does in Canada, except that they collectively needed $187 billion worth of government bailout cash in 2008 when the American housing market imploded.

Fannie and Freddie don't make loans directly, but buy mortgages from lenders, package them as bonds, guarantee them against default and sell them to investors. Fannie Mae and Freddie Mac take existing mortgages off the balance sheets of banks, allowing the latter to go out and loan out new money to new homebuyers. Together, they currently own or guarantee half of all U.S. mortgages and back nearly 90 per cent of new ones.

The president's plan to wind them down has bipartisan support.

Under the plan, the government would only step in to pay out mortgage guarantees after private capital has been exhausted and would ensure that private capital would bear the substantial majority of any losses.

Built into that system would be a guarantee that 30-year mortgages would still be available. Officials said that would involve some type of government guarantee for lenders, though they did not detail what that would entail.

"So many Americans across the country view their own economic and financial circumstances through their homes and whether they own a home, whether their home is underwater, whether they feel like they have equity in their homes," White House spokesman Jay Carney said Monday.

It's the latest leg of a nationwide tour Obama has embarked on this summer to refocus his agenda on middle class economic issues such as housing, jobs, health benefits and the cost of education.

It's believed Obama's plan will be very similar to other efforts spearheaded by Tennessee Republican Senator Bob Corker and Virginia Democrat Senator Mark Warner to achieve the same thing, which Congress and the U.S. Senate have already expressed broad support for.

It's believed Obama will also tout refinancing proposals that gained little traction on Capitol Hill when he first unveiled them last year. Among his proposals is a call for expanding refinancing eligibility for homeowners who do not have government-backed mortgages.

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