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IPFS News Link • Federal Reserve

Federal Reserve Recommends Expanding GSEs to Turn Housing Market Around


While most analysts are recommending minimizing Fannie Mae and Freddie Mac or even winding them down, the Federal Reserve says that the best way to rescue the United States housing market is to use the government-controlled GSEs in a larger capacity in the coming year to provide “cheaper mortgages to a broader pool of homeowners”[1]. The recommendation comes as a surprise to many, given that even the current administration’s official policy on the two debt-riddled agencies is that their role in housing finance should be reduced. However, in a paper sent to lawmakers yesterday, Fed analysts propose to expand GSE roles in government financing programs in order to bring down the inventory of unsold homes in the country and put more people back in a homeownership position. Part of this plan would include allowing Fannie and Freddie to refinance loans that they have not guaranteed.

The proposal for expansion comes fast on the heels of the paxroll tax cut extension, which was approved for two months right before Christmas and will be financed for decades using the fees from GSE-guaranteed loans. Some might argue that this proposal is nothing more than a grab for more loans on which to assess fees, but in the letter to lawmakers the analysts insist that the move would simply get more people back in vacant properties, thereby removing a stumbling block to the housing recovery and a greater economic recovery. The move would potentially allow as many as 2.5 million more existing homeowners to refinance their loans through the Home Affordable Refinance Program (HARP), but it would also create an even greater debt situation for the GSEs and, as a result, for the American taxpayers funding Fannie and Freddie.


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