banking

5 steps to improve the financial system

Replace Fannie and Freddie
Replace Fannie and Freddie © Frontpage/Shutterstock.com

Lawmakers and officials from President Barack Obama's administration have acknowledged that the financial regulatory overhaul had a glaring oversight: housing finance reform.

The real estate bubble was at the epicenter of the crisis, but substantive restructuring of Fannie Mae and Freddie Mac would have to wait until markets were calmer and policymakers could devise a transition plan. Since that time, the government has been trying to gradually reduce the level of government backing for housing debt, which in the immediate aftermath of the real estate bust covered 95 percent of residential mortgages, according to the Congressional Budget Office.

But a comprehensive plan to replace Fannie and Freddie with a new system of mortgage finance remains elusive to Washington, D.C., policymakers. Even as the regulators squeeze the size of the two entities' portfolios by raising loan limits and tightening requirements, the turnaround in the housing market is making both more profitable. This raises fear by some reform advocates that momentum for a housing finance overhaul may slow.

At issue is what structure could replace Fannie and Freddie for financing trillions of dollars of home mortgages each year.

The Financial Stability Oversight Council recommends that housing regulators help standardize the market by creating a common platform for packaging home mortgages, improving the mortgage recording and title transfer system, drafting model legal agreements and revamping the compensation system for mortgage servicers.

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