Real Estate

Feds Consider Home Finance Reform

  • The Obama Administration will present Congress with a plan by January 2011 to reform the nation's home financing system
  • Restructuring or replacing Fannie Mae and Freddie Mac may be part of the plan
  • Critics urge a more balanced housing policy that puts less emphasis on homeownership and better supports the rental market


Homeownership is the center of the American Dream. It's seen as the key to building personal wealth, stabilizing communities, and stimulating the economy. How far should the government go to help people buy their own homes? For decades, the federal government provided tax credits, loan guarantees and other incentives to encourage home ownership.

The Obama Administration has promised to reform the housing finance system. That could mean big changes for the mortgage industry and American home buyers.

Financing the American Dream

The burst of the housing bubble has policymakers questioning whether government finance programs put too many people in homes they couldn't afford and brought Wall Street to the brink of a collapse.

From the Homestead Act after the Civil War to the GI Bill after World War II, government programs helped make home buying affordable. By 2004, 69 percent of Americans lived in their own homes. Housing prices peaked in 2005.

In 2007, the bubble burst. Housing prices plunged and foreclosures skyrocketed. The secondary mortgage market collapsed, and the US economy fell into its worst recession since the 1930's. Homeownership dropped below 67 percent and it's still falling.

Housing Finance Reforms

Now the Obama Administration is working to repair a housing finance system it says is broken. Treasury officials will meet with academic experts, industry leaders, and interest group representatives at a Washington conference on August 17, 2010 to discuss the future of home financing.

Obama has pledged to deliver a reform proposal to Congress by January 2011. The proposal should include a more balanced policy between encouraging homeownership and making renting affordable and acceptable. That could mean more government help for low-income renters as well as measures to make it harder to buy a house, like reducing available credit and requiring larger down payments.

Rethinking Homeownership

The White House will also reconsider its pro-homeownership policy. Some question the wisdom of incentives like the tax deduction for mortgage interest and tax exemption on capital gains from home sales, and policies causing overinvestment in the housing market that ultimately shortchange other parts of the economy.

Groups like the National Multi Housing Council (NMHC) want a more balanced housing policy that supports the rental market. The NMHC points out that married couples with children dominated the housing market for many years, but those families make up less than 25 percent of today’s American households. Single parents, young professionals, and empty nesters who appreciate the convenience and mobility of apartment living are increasing.

Landlords and other property owners have faced some of the same problems as homeowners, but with less aid and fewer resources. Renting may be an appeal to those who don’t want to be tied to a mortgage payment, even if they live in a house.

Fannie Mae and Freddie Mac

Changes to Fannie Mae (Federal National Mortgage Association – FNMA) and Freddie Mac (Federal Home Loan Mortgage Corporation - FHLMC) are likely to be included. These giant, shareholder-owned corporations chartered by Congress buy mortgages from banks and repackage them into securities sold to investors. By 2008, they owned or guaranteed over half of the US $12 trillion mortgage market.

They operate as government-sponsored enterprizes, or GSEs. That means their profits go to private shareholders, but the government pays for any losses. The White House says this “heads private shareholders win, tails taxpayers lose system” makes no sense for the nation.

When the housing market soured, Fannie and Freddie faced huge losses. The government stepped in with a big bail out estimated to cost taxpayers $389 billion over the next 10 years.

The American Dream has changed over the years, and buying and maintaining a home is a big responsibility. Sometimes that's a downside, too. It's time to take a strong look at the housing industry and its effects on homeowners, renters and making sure you realize you have options.

Questions for Your Attorney

  • What can I do to influence reforms to the nation’s housing finance system?
  • Could changes to Fannie Mae or Freddie Mac affect my mortgage?
  • How do I learn about government programs that help make housing affordable?

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