President Obama will call for a limited government role in the U.S. mortgage market by replacing Fannie Mae/ Federal National Mortgage Association (OTCBB:FNMA) and Freddie Mac/ Federal Home Loan Mortgage Corp (OTCBB:FMCC).

Barak obama

Barack Obama is set to outline the path to replace the mortgage giants during his speech Tuesday on housing and economy.

Last month, while speaking to students at Knox College in Galesburg, Illinois, President Obama indicated he would work both parties to turn the page on Fannie and Freddie Mac and build a new housing finance system, according to The Wall Street Journal.

Obama supports limited government role

During his speech Tuesday, President Barack Obama is expected to begin making the case that a limited government guarantee is required to preserve access to the long-term, fixed rate loans.

President Obama will propose eliminating mortgage finance entities Fannie Mae/ Federal National Mortgage Association (OTCBB:FNMA) and Freddie Mac/ Federal Home Loan Mortgage Corp (OTCBB:FMCC) over time, replacing them with a system in which the private market buys home loans from lenders and repackages them as securities for investors.

However, Barack Obama is expected to call for ending the business model of the two GSEs which took on risk that benefited private shareholders during good times and saddled taxpayers with losses when the housing market crashed in 2008.

The U.S. government put the mortgage giants into conservatorship almost five years ago, and deferred the hard work of creating a new, viable housing-finance market.

Proposed bill will replace FHFA With FMIC

Sens. Bob Corker, R-Tenn., and Mark Warner, D-Va introduced a bipartisan Senate bill to replace the Federal Housing Finance Agency, the conservator of Fannie Mae and Freddie Mac, with a government agency, the Federal Mortgage Insurance Corporation.

The proposed FMIC is expected to perform the same way the Federal Deposit Insurance Corporation guarantees bank deposits to prevent bank runs. The bipartisan bill has received support so far from five Republicans and five Democrats in the Senate.

President Barack Obama’s position on mortgage echoes the bipartisan Senate Bill.

The White House proposal is set to face opposition from House Republicans, who have proposed a bill through the Financial Services Committee. The bill is set to eliminate the two GSEs within five years and replace them with a National Mortgage Market Utility to securitize mortgages.

President Barack Obama’s speech is expected to outline other initiatives that would begin shrinking the federal government’s outsized role in the mortgage market, while ensuring a gradual decline in loan limits in high-cost housing markets.