Thirty-year mortgages will still be around, but will likely be a bit more expensive under the proposal President Obama laid out today for replacing Fannie Mae and Freddie Mac.

Obama's plan calls for limiting the government's role in the mortgage market in favor of a market based on and driven by private capital. Currently, 80 percent of all U.S. residential mortgages are backed by the government through Fannie Mae, Freddie Mac or the FHA, a model that a White House statement describes as "unsustainable."

Under Obama's proposal, the government's role would be limited to providing an explicit guarantee against catastrophic losses in the event of another severe downturn in the housing market. Private capital backing a portfolio of mortgages would have to be wiped out before the government guarantee would kick in.

Differs from Fannie, Freddie guarantee

That's a change from the current system under Fannie Mae and Freddie Mac, which limit the losses an investor can suffer on any mortgage. With a mortgage backed by Fannie or Freddie, an investor is guaranteed to get most of their money back, even if the loan goes bad and a foreclosure sale recovers only a small fraction of the balance on the mortgage.

That's how taxpayers ended up on the hook for billions in losses suffered by Fannie Mae and Freddie Mac during the Great Recession. The White House says Obama's new plan will be covered by a fee that will be actuarially based (that is, sufficient to cover any losses that may occur) so that taxpayers will not be on the hook again should another downturn occur.

Such a fee would likely be more expensive than the premiums currently charged by Fannie Mae and Freddie Mac, so mortgages will likely become more expensive than they are under the current system.

The key reason for maintaining some sort of government guarantee on residential mortgages is to keep the cost down so middle-class buyers can continue to afford them. A particular concern is maintaining the availability of 30-year fixed-rate mortgages, which likely would not exist under a strictly private mortgage market.

Taxpayer losses still possible

Of course, it's impossible to say what sort of losses even the new system might sustain if home prices were to collapse again. Even if the proceeds from the new premiums were set aside in a special fund, taxpayers could still be on the hook if losses were to exceed the amount available in that fund.

The losses suffered by Fannie Mae and Freddie Mac during the economic crash were originally estimated to cost taxpayers $187 billion in bailouts, though that figure has since been reduced to $137 billion. It's worth noting that with tighter lending standards and strong demand for refinancing in recent years, the two companies have been profitable enough to repay $55 billion of that amount to the U.S. Treasury, and Moody's Analytics projects they are on course to repay the whole amount by 2019, if not several years sooner.

Published on August 6, 2013