Obama’s Cautious Housing Plan

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When you hold 90% of the market in something, how do you get out of it without tanking prices? That’s the problem the U.S. faces with Fannie Mae and Freddie Mac, which requested $3.1 billion more in aid from the Treasury Department Friday as part of their ongoing conservatorship with the federal government. On the one hand, there’s a political imperative to fix the mortgage giants: everyone wants the government to diminish its massive footprint in the housing market and calls for reform have been mounting since the financial crisis. On the other, the housing market remains dangerously weak and the last thing anyone needs is for a sudden shock that could drive renewed economic crisis.

That’s how you explain the rhetorically dramatic but substantively cautious plan unveiled this month by the White House to diminish the government role in the housing market. The U.S. plans over the long term to scale back its role in the market, but will go very, very slowly to diminish its position over the next three years.

The idea is to prime the pump in the private market by showing the administration’s intention to get out of the way–but not too fast. “We’re trying to avoid creating another shock to the market,” says a senior administration official, “But you need to give private capital some sense of where you’re heading. You’re not going to get the private sector in a place to pick up market share unless you tell them where the market share is going to be.”

The mechanics of the first, cautious step are straightforward. The government will raise fees for its guarantees, making private lenders more attractive. Second it will lower conforming loan limits, forcing people who want bigger loans to turn to the private market. Lastly, the administration plans to raise the credit threshold to get a loan. Each of these measures can be done incrementally as the market allows. Even if they are done aggressively, the expectation is that they will only reduce the government footprint 5%, the senior administration official predicts.

The long term goal is more aggressive: reducing the U.S. share of the market to less than 50%. But don’t expect to see that any time soon. More than anything, the administration is looking to kick off a debate with Republicans over where the end state should be. Part of that is politics: the administration thinks if it makes a long-term proposal it will be politically vulnerable for not doing enough to fix the broken system.