How the administration plans to wind Fannie Mae and Freddie Mac down

In a move that had been widely anticipated, the Obama administration said Friday that it wanted to get the government out of the mortgage business by winding down operations at Fannie Mae and Freddie Mac over the next five to seven years.

"Fundamental reform" is the aim, Treasury Secretary Timothy Geithner said in announcing the plan to not only "shrink the government footprint in housing," but also "strengthen consumer protection and preserve access to affordable housing for people who need it."

The plan calls for:

Withdrawing government support of housing finance by gradually eliminating Fannie Mae and Freddie Mac, which would bring private capital back into the market. The government now guarantees nine of every 10 home loans, which Geithner says has discouraged private capital's return.

"Leveling the playing field" for private capital by gradually making it more costly to get a loan at Fannie and Freddie.

Reducing conforming loan limits - the maximum size of loans the two government-sponsored enterprises (GSEs) can guarantee - after temporarily increasing them, as scheduled, on Oct. 1. Geithner said the administration would work with Congress to make other changes in the future.

Phasing in a 10 percent down-payment requirement for Fannie and Freddie borrowers, "to further protect taxpayers."

Winding down Fannie and Freddie investment portfolios at the current annual rate of 10 percent.

Although the stocks of private mortgage insurers such as Radian Group Inc. of Philadelphia rose shortly after Geithner's announcement, reaction from other corners of the housing industry was less enthusiastic.

The 160,000-member California Association of Realtors said the plan would raise borrowing costs and restrict a safe and affordable flow of financing, further impeding a still-fragile housing recovery.

American Bankers Association CEO Frank Keating suggested that rather than develop a "silver bullet" solution to housing finance, policymakers should create a well-regulated covered bond market and enhance the Federal Home Loan Banks "to better help them meet their mission of providing advances to private market portfolio lenders with minimal taxpayer exposure."

Saying that Fannie Mae and Freddie Mac's multifamily programs "were not part of the meltdown" and were a "vital capital source for the rental-housing sector," National Multi Housing Council president Doug Bibby urged the government to be cautious in its overhaul efforts.

Yet economist Anthony Sanders, a professor of real estate finance at George Mason University in Fairfax, Va., said that aside from saving U.S. taxpayers hundreds of billions of dollars in the future, not much would change in a world without Fannie and Freddie.

"After pumping trillions into the mortgage market since 1998 through the GSEs, the homeownership rate is back to 1998 levels," Sanders said. "Enormous pain and suffering occurred in the United States trying to go from 66 percent to 70 percent homeownership."

Success in reforming the mortgage finance system will depend on striking a balance "between the benefits of the private sector and the backstop of the federal government," said Mark Zandi, chief economist at Moody's Analytics.

If not done correctly, Zandi said, these changes "could mean much higher rates and the demise of the fixed-rate loan as the mainstay of the mortgage market."