The government spent roughly $130 billion to bail out Fannie Mae and Freddie Mac in 2008, a decision that has kept the secondary mortgage market alive, albeit on life support. Today, Fannie and Freddie, along with government-sponsored Ginnie Mae and the FHA, guarantee or insure nine out of 10 mortgages. However, political pressure is mounting to reduce the government's role in providing mortgage liquidity, perhaps to the point of dismantling Fannie and Freddie all together.

On Feb. 11, the Treasury and HUD released the report "Reforming America's Housing Finance Market," which outlined potential strategies for reducing the government's hand in the mortgage markets. The report called for specific actions such as increasing loan guarantee fees, reducing conforming loan limits, and requiring bigger down payments of at least 10% for loans to be eligible for a government guarantee. Moreover, it suggested that legislators make more wholesale changes to the current system by returning FHA to its role as a provider of affordable home loans for low- to moderate-income people and creating a privatized housing finance system where the government role would be severely limited.

Although the Treasury and HUD failed to provide any sort of timeline for winding down the GSEs, as well as any additional details as to how the government will entice private capital back into the secondary mortgage market, the response from many industry stakeholders was that the report spelled bad news for the for-sale housing market even as near-term fallout was expected to be minimal.

Credit Suisse analyst Dan Oppenheim said the suggested reforms to FHA would have a significant negative effect on builders, as FHA insures as much as 60% of the loans originated by many builders. In a related research note, he wrote the changes "would reduce mortgage availability and raise the cost of mortgages, hurting affordability overall."

Moreover, UBS housing analyst David Goldberg remained concerned that the changes could sideline housing's recovery. "We continue to expect few significant changes from Congress/regulators near term, as housing remains fragile and policymakers are concerned about further price declines," he wrote in a research note published Feb. 15. "That said, Treasury's report represented a dramatic shift in attitude toward homeownership, with greater emphasis being placed on affordable renting options."

Builders also appeared to be mostly in wait-and-see mode. During an earnings call hours after the report was released, M.D.C. Holdings vice president of finance and business development Bob Martin responded to questions from analysts about how the company would transition away from government-backed financing for its buyers if some of the proposals outlined in the report were implemented. He said:

"I think the short answer is having FHA financing is a good thing for us. But if it becomes not available, we'll have to deal with it at that time, including as we go through the underwriting of new deals, considering it in the evaluation ... With regard to existing subdivisions, in many cases, we would have opportunities to change plans and do different product than we had originally planned [to conform to new government loan limits]."