WASHINGTON Talk of shrinking the governments involvement in the mortgage market is growing. Just dont expect action any time soon.
A conference Tuesday at the Treasury Department is the first of many steps toward restructuring the nearly $11 trillion mortgage market. So far, rescuing mortgage giants Fannie Mae and Freddie Mac has cost the government more than $148 billion. That number is expected to grow.
Treasury Secretary Timothy Geithner pledged fundamental change to the structure of Fannie and Freddie, which profited tremendously during good times, but they burdened taxpayers with losses when the housing market went bust. He said the two companies werent the only cause of the financial crisis, but made it worse.
Geithner, however, did not offer a specific exit strategy for Fannie and Freddie. He said only that, it is our responsibility to make sure that we create a system that is not vulnerable to these same failures happening again.
With Republicans likely to pick up seats in Congress in November, however, the Obama administration will need support from both political parties for the changes it proposes.
Reflecting this reality, Geithner said that the failures that produced the system we have today were bipartisan. The solution must be as well.
Executives and mortgage experts are prepared to tell Obama officials that the government must stay in the business of backing U.S. mortgages even if Fannie and Freddie disappear someday.
At the end of the day, the government will still have a very large role to play, said Mark Zandi, chief economist at Moodys Analytics and a panelist at the event. Others include mortgage executives from Bank of America Corp. and Wells Fargo & Co, plus Bill Gross, managing director of bond giant Pimco, and Lewis Ranieri, one of the creators of mortgage bonds.
The Obama administrations management of Fannie and Freddie has been under fire for months from Republicans on Capitol Hill. On Christmas Eve 2009, the Treasury Department eliminated a $400 billion cap on how much money it would give the mortgage giants to keep them from failing. Sen. John McCain, R.-Ariz., has called that a taxpayer-backed slush fund and called for the support to be wound down.
Many in the mortgage industry say thats not realistic.
There has to be a game plan, said Paul Leonard, vice president of government affairs at the Housing Policy Council, a mortgage industry group. You cant just pull the plug on them.
Fannie and Freddie buy mortgages and package them into securities with a guarantee against default. They have ensured that millions of Americans can get home loans even after the housing market collapsed.
The two mortgage giants, the Federal Housing Administration and the Veterans Administration, together backed about 90 percent of loans made in the first half of the year, according to trade publication Inside Mortgage Finance.
At some point the government will have to scale back the level of support it provided the housing and mortgage markets during the recession and financial crisis.
The governments footprint in the housing market needs to be smaller than it is today, said Shaun Donovan, President Barack Obamas housing secretary.
Most of the plans being circulated to reshape the mortgage market call for the government to guarantee that investors who buy mortgage-backed securities receive their money even if borrowers default.
Under this system, Fannie and Freddie either could be returned to private ownership or phased out completely. Fannie and Freddie, or their replacements, would pay the government to insure the loans. That money could be tapped if the housing market collapses.
A government guarantee is both a desirable and necessary component of the countrys housing finance system, wrote John Gibbons, a Wells Fargo & Co. executive vice president, in a letter last month to the Treasury Department.
Geithner said that there is a strong case to be made for such a government guarantee, but said the government needs to charge enough money to make sure the taxpayer does not get hit with losses in the future.