Fannie Mae and Freddie Mac could be wound down

Housing protesters The US housing crash has become one of the government's most sensitive political issues

The Obama administration has proposed an overhaul of the US mortgage market that would limit the government's role in supporting home ownership.

Under the proposals, the state-backed mortgage guarantee giants Fannie Mae and Freddie Mac would be wound down.

The two firms have received almost $150bn in taxpayers' support since the US housing market collapsed.

Treasury Secretary Timothy Geithner said the US would not do anything to worsen the fragile housing market.

The administration has laid out three options: to only guarantee mortgages to poorer borrowers; support the mortgage market only in times of stress; or to guarantee mortgage investments created by private companies.

The government currently owns or guarantees more than 90% of US mortgages.

Congress will now review and debate the proposals. However, with the housing market a hugely sensitive issue, it could take some time before any proposal becomes law.

Analysis

For decades the state sponsored enterprises Fannie Mae and Freddie Mac were a beacon for America's booming housing market. They were created to make home ownership in the US more affordable.

These days, they are a sore reminder of the recent mortgage meltdown.

The Obama administration intends to wind them down as part of sweeping changes to how mortgages are financed.

The housing market remains one of the weakest links in the country's economic recovery and critics fear that any rapid changes might make the situation worse. With millions of Americans still searching for work, that's an outcome nobody wants.

The proposals also include increasing the mortgage insurance premium charged by the Federal Housing Administration, which generally offers lower rates and affordable down payments to home buyers.

Analysts believe the current system helps to keep a cap on mortgage interest rates, and that any change is likely to lead to a rise.

"It's clear the administration wants the private sector to take a more prominent role in the mortgage rates, and in order for that to happen, mortgage rates have to go up," said housing economist Thomas Lawler.

Banks and other mortgage providers would prefer to see adjustable-rate mortgages that fluctuate with the markets.

So, one casualty of any change is likely to be the popular 30-year fixed rate mortgage.

Speed needed

Mr Geithner told the CNBC television channel: "We are going to make sure we move very carefully so we don't impede the process of repair in the housing market."

But he added: "We can't wait too long. It's important Congress legislates some time over the next two years."

Fannie Mae was founded in 1938 at a time when millions of families could not become homeowners, or faced losing their homes, because of a lack of mortgage funds. It was a government agency until 1968.

Freddie Mac was created in 1970 to provide competition to Fannie Mae.

The firms do not lend directly to homebuyers, but buy mortgages from approved lenders and then sell them on to investors.

Democrats and consumer groups have said they feared mortgage rates would soar if the housing finance system were left mainly to the private market, and that fewer people could afford traditional 30-year, fixed-rate mortgages.

Although rates are rising, the US average for a 30-year, fixed loan is about 5%

"Compared to the way things operated in the past, credit would be a little less easy to obtain, and the terms would be a little less attractive," said Nigel Gault, chief US economist with IHS Global Insight.

He added one benefit to this was that housing would be less of an attractive investment - meaning people may be more likely to rent homes, while banks would be more wary over lending.

But Mr Gault said that removing such buyers from the market may cause home prices to fall - helping first-time buyers but hurting homeowners.

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