Obama seeks new design for housing, Fannie/Freddie

WASHINGTON: The US government’s role in housing finance should undergo “fundamental change,” but it should still provide some guarantees in the mortgage market, Treasury Secretary Timothy Geithner said on Tuesday.

Setting the stage for what promises to be a long debate about fixing Fannie Mae and Freddie Mac, Geithner convened a conference of housing industry leaders and heard a range of ideas about reforms for the US$10.7 trillion (RM33.8 trillion) mortgage market.

Almost two years after the government seized Fannie and Freddie to save them from collapse, there is a widely held view that reform is needed, but the agreement ends there.

“It’s safe to say there’s no clear consensus yet on how best to design a new system. But this administration will side with those who want fundamental change,” Geithner said.

Fannie and Freddie — recipients of US$150 billion in taxpayer bailout money since being taken over by the Bush administration in 2008 — pose a vexing policy challenge to the Obama administration as November elections approach.

The firms’ pursuit of growth and profits helped precipitate the financial crisis of 2007-2009, but their vast resources also helped minimise its impact. And since their takeover, the two have only become more prominent in the market.

Together, the two companies and the Federal Housing Administration now back 90% of new US home mortgages.

“We will not support returning Fannie and Freddie to the role they played before conservatorship, where they took market share from private competitors while enjoying the perception of government support,” Geithner said.

“We will not support a return to the system where private gains are subsidised by taxpayer losses.”

But Geithner backed some government guarantee for mortgages and US support for housing more broadly, setting early limits on the reform discussion.

“There is a strong case to be made for a carefully designed guarantee,” he said. “The challenge is to make sure that any government guarantee is priced to cover the risk of losses, and structured to minimise taxpayer exposure.”

As the administration works to draft a housing overhaul by January, the key question, Geithner said, will not be whether government has a role to play in supporting the mortgage market and the “American dream” of home ownership.

In Geithner’s view, government has a key role since private markets, as shown in the 2007-2009 credit crunch, “left to their own devices, find it hard to resolve financial crises”.

The conference, including some of the mortgage sector’s top lenders and investors, was billed as a “listening session” to help the administration develop its overhaul plan.

It comes amid signs of persistent weakness in housing markets — an issue that could weigh on voters headed to the polls in November, especially in Florida and California.

Housing starts nationwide rose in July from a downwardly revised level in June, but the pace of new construction was much weaker than forecast and permits for future building fell to their lowest level in more than a year, according to a US Commerce Department report on Tuesday.