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New Plans to Improve Fannie Mae and Freddie Mac

As the dust has settled on the housing and mortgage crisis, several groups are considering new reform plans for Fannie Mae, Freddie Mac and the Federal Reserve. The fact is that is wasn’t just subprime home loans that defaulted.  Many conforming, jumbo and FHA loan activity saw huge increases in foreclosures and delinquencies.  Sure the bad credit mortgage programs failed miserably, but the dramatic rise in prime mortgage defaults underlines the fact that financial crisis was fueled by a lot more than subprime mortgages. Just ask the sub prime lenders how it worked out for them. Thousands of these alternative lending companies went out of business between 2006 and 2008.

A new report from a liberal think tank with close ties to the Obama administration provides one of the most detailed mortgage industry road maps yet for the creation of a home financing entity to succeed Fannie Mae and Freddie Mac. This new home loan proposal is slated to be unveiled Thursday by the Center for American Progress, crystallizes the approach that leading liberal policy makers favor for dividing up the myriad functions that have been filled by Fannie and Freddie. The paper calls for bringing “as much private capital as possible” back to the mortgage market, where more than nine in 10 new loans today carry some kind of government backing. Under the proposal, privately-owned firms chartered by a federal regulator would issue mortgage-backed securities that carry explicit government guarantees. (By contrast, Fannie and Freddie were chartered by Congress and their securities and corporate debt carried an implied government guarantee until they were rescued by the U.S. in 2008.) Fees charged on mortgage bonds issued by the firms would finance a catastrophic risk insurance fund, similar to how the Federal Deposit Insurance Corp. charges fees to banks to help finance rescues of failed institutions. If a mortgage firm became insolvent, the government would guarantee payments to investors on the guaranteed mortgage securities, but the firm itself wouldn’t be rescued. Multiple firms would issue the same mortgage security, allowing bonds to continue trading if one issuer failed.  > Read the original Wall Street Journal Article

Posted in Subprime mortgage news.

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