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August 24, 2010 Tuesday 9:22 AM EST
SECTION: NEWS & COMMENTARY; Commentary; MarketWatch First Take
LENGTH: 331 words
HEADLINE: A first step to fixing the mortgage mess
NEW YORK (MarketWatch) — The free ride for mortgage banking may be coming to an end. Good riddance.
The Obama administration’s reportedly hinting at the first part of reform for troubled mortgage-finance giants Fannie Mae (FNMA) and Freddie Mac (FMCC) , floating the prospect of fees for federal backing of loans.
The plan suggests the administration still sees a role for the government in the marketplace, but would curb risk by making what had been a handout, a fee-based service instead.
The plan isn’t without its risks.
Higher fees could make it more costly for borrowers as banks are likely to pass on costs. And big mortgage originators including Bank of America Corp. (BAC) and J.P. Morgan Chase & Co. (JPM) might also cut back on credit if the cost of selling loans to the government become prohibitive.
Higher fees also fail to address the main problem with the current system — namely, private investors including banks, insurance companies and hedge funds have exited the market. Only 10% of mortgages are held outside of Fannie and Freddie.
Reducing the government’s exposure to the mortgage market is important, not only because it puts taxpayers at risk but because it’s a big culprit in creating overcapacity in the mortgage market and creating the housing bubble. Treasury Secretary Timothy Geithner says the government will have a role, albeit a smaller one.
Whether it’s lender cooperatives replacing the government or some other plan, unwinding Fannie and Freddie is a task equal to financial or health-care reform: It’s complicated, challenging and has the potential to derail the economy.
No wonder, then, that the Obama administration and Congress want to put off a full reform proposal to next year.
For now, higher fees are a small step but an important one, a signal that the free ride for banks and borrowers may soon be coming to an end.
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