Geithner: Abandoning Fannie Mae Not a Solution to Mortgage Crisis

Article excerpt

Treasury Secretary Timothy Geithner said Tuesday that the mortgage crisis will not lead the administration either to abandon or nationalize mortgage giants Fannie Mae and Freddie Mac.

Treasury Secretary Tim Geithner offered a tentative road map Tuesday for fixing what he called America's "damaged" system of housing finance, symbolized by the financial woes of Fannie Mae and Freddie Mac.

The the task is one of the most difficult mop-up and reform operations arising from the mortgage crisis.

For now, Fannie and Freddie are losing lots of money, and are in a Treasury conservatorship that puts US taxpayers on the hook. At the same time, the Obama administration is relying on Fanny and Freddie, sometimes called government-sponsored enterprises (GSEs), to keep home loans available amid a historic housing-market bust.

In his testimony before the House Financial Services Committee, Mr. Geithner did not offer a detailed reform proposal, but outlined some guiding principles. Significantly, he did specifically reject some options.

He argued against what might be called the two extremes on the policy spectrum - nationalizing Fannie and Freddie as government agencies or ending any government role in mortgage finance. He also said he doesn't see much promise in "creating a whole new class of GSE's to compete with each other."

Geithner's options

What other options would be left? Some in-between frameworks, in which government backing for standard mortgage loans would continue.

"Some government support, particularly through the provision of guarantees or insurance, can contribute to financial stability and help reduce booms and busts in home prices," Geithner said.

He predicted that Congress will decide that there's a good case for "a carefully calibrated guarantee, appropriately priced, that would continue in some form."

Fannie and Freddie play a central in mortgage markets by buying or guaranteeing millions of home loans made by other lenders each year. This is especially important in times of turmoil, when banks or mortgage brokers might not otherwise have funding to write new loans.

Geithner acknowledged that the hybrid status of Fannie and Freddie - a mix of private shareholder ownership with implicit government backing - has been a recipe for taxpayer risk and must be ended. …