ST : Tighter rules for US home buyers

12 Feb 2011,
Tighter rules for US home buyers

They include mandatory 10 per cent downpayment for purchase of homes and other reforms

WASHINGTON: The Treasury Department yesterday proposed to set a mandatory 10 per cent down payment for US home buyers and to wind down state-backed mortgage lenders that have underpinned the housing market for 40 years.

'The plan is for fundamental reform, to wind down the GSEs (government-sponsored enterprises), strengthen consumer protection and preserve access to affordable housing for the people who need it,' it said in a report.

Launching what could be the biggest shake-up of the housing market in a generation, the Obama administration said home buyers should have to put down at least a 10 per cent deposit to buy a home.

The wide-ranging proposals effectively end the US government's long-standing support for the goal of having every American own their own home.

'The administration believes that we must continue to help ensure that Americans have access to quality housing they can afford,' the proposals said.

'This does not mean, however, that our goal is for all Americans to become homeowners.'

While some proposals would have a direct and quick impact on home buyers, it is the reforms of Fannie Mae and Freddie Mac that may have the broadest effect.

The two firms, which before the crisis back-stopped around three quarters of the housing market, have come under fire for their role in fuelling the housing bubble.

In the wake of a long and painful recession, the government has been left to guarantee - directly or via deals with bank lenders - 'more than nine out of every 10 new mortgages.' Yet despite their role in the financial melt-down, reforming Fannie and Freddie remains politically charged.

Supporters argue the lenders have made housing affordable for millions of poorer Americans. Critics say they represent unwarranted government interference in the housing market.

The Obama administration called on Congress and stakeholders to have an 'honest discussion' about the way forward.

While laying out three broad options to overhaul the mortgage lending system, the administration is letting Congress make the final decision.

The Treasury Department said in its report that the government should withdraw its support for the mortgage market slowly, over five years or more. The report describes a path for winding down Fannie Mae and Freddie Mac, which have swallowed US$150 billion (S$192 billion) in federal aid since the government took them over in September 2008.

Under any scenario, the private sector will assume a greater role in housing finance as the government scales back its involvement.

By handing the decision to Congress, the administration sidesteps one of the most complex and politically explosive questions facing America's financial system. Any of the three options will almost certain force mortgage rates to rise.

AGENCE FRANCE-PRESSE, ASSOCIATED PRESS