On Friday, the Obama administration laid the foundation for what is sure to be a fierce debate about the role government should play in supporting homeownership in the United States in the wake of the housing bubble and financial crisis.

The Treasury Department and the Department of Housing and Urban Development issued a report to Congress outlining how government can gradually scale back its involvement in the mortgage market and transfer housing finance to the private sector. The report proposes abolishing the government-backed mortgage providers Fannie Mae and Freddie Mac within ten years and suggests three possible systems to take their place.

These changes would precipitate nothing less than a revolution in the housing market. As The New York Times points out, Fannie, Freddie, and the Federal Housing Administration currently guarantee more than 90 percent of all new mortgages. The Wire dove into today's report to determine what it could mean for homeowners if Fannie and Freddie are indeed wound down and one of the government's proposed alternatives is adopted. It seems that any way you slice it, mortgages are likely to get more expensive.

Scenario #1: Government only insures mortgages for creditworthy borrowers with low or moderate incomes

PROS: Money could flow from housing to other sectors of the economy, private mortgage lenders might refrain from taking risks without government guarantees, and taxpayers could be less exposed to private lenders' losses in the mortgage market

CONS: Mortgages--and particularly the standard 30-year, fixed-rate mortgage--could become substantially more expensive for anyone who doesn't qualify for mortgage credit from the government (most Americans), while small lenders and community banks could be driven out of business by larger institution

Scenario #2: Scenario #1, but government can expand access to mortgage credit during a housing crisis

PROS: If the housing market blows up, we're better off than we are in Scenario #1

CONS: That 30-year, fixed-rate mortgage will still cost significantly more than it does today

Scenario #3: Government insures mortgage-backed securities but not actual home loans

PROS: Mortgages would be less expensive than in Scenarios #1 and #2 as investors enter the mortgage market and small lenders and community banks find it easier to compete

CONS: We might grapple with the same problems we're facing now: inflated housing prices, excessive risk-taking, and taxpayer exposure

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Uri Friedman