New FHFA mortgage security proposal could government’s first step out of housing market

The Federal Housing Finance Agency has proposed replacing the mortgage-backed securities that Fannie Mae and Freddie Mac currently issue with a uniform security in a strategic plan it sent to Congress and the Obama administration, the Wall Street Journal reported.

The switch would mark a major change for both companies, and according to the FHFA paper, would be a public utility that could outlast the government-sponsored enterprises. The firms currently adhere to individual proprietary systems for mortgage-backed securities. If successful the new mortgage security platform could be accessed by lenders outside Fannie and Freddie.

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As a result, the new, uniform security could eventually be a critical step towards shrinking Fannie and Freddie should the government ramp up its efforts to retreat from the housing market. However, Congress and the Obama administration haven’t taken a firm stance on the fate of the mortgage titans and their $5 trillion in guaranteed mortgages.

The Journal noted that the FHFA has been placed in a precarious spot as it was enlisted to help steer Fannie and Freddie clear from losses, but has simultaneously taken criticism for its aversion to principal reductions that would force losses. [WSJ]