Geithner: Private Market Return Part of Fannie, Freddie Fix

Fannie Mae, Freddie MacThe mortgage financing system under Fannie Mae and Freddie Mac, absorbed almost entirely by the U.S. government after lax underwriting and careless risk-taking, needs “fundamental reassessment and reform,” U.S. Treasury Secretary Timothy Geithner told a Congressional committee today.
The overhaul, though, will still result in some U.S. involvement with the two government sponsored enterprises, and not a full privatization as urged my many Republicans.
And Geithner does not feel pressured by calls to act quickly, deferring a reform proposal until after U.S. officials receive input from the public and experts.
But the Treasury secretary stressed that a primary goal of reform was drawing the private sector back into mortgage financing.
“Government’s role in the housing finance system and level of direct involvement will change, however, and the Administration is committed to encouraging private capital to return to the housing finance market,” Geithner told the House Committee on Financial Services.
He added that “an effective transition plan will seek to maintain the extensive infrastructure, knowledge, personnel and systems of Fannie Mae and Freddie Mac.”
As a result of a virtual absence of private capital in mortgage origination, Fannie and Freddie financed or guaranteed more than 70 percent of new single-family mortgages in 2009, compared to 40 percent in 2006.
“The substantial direct support for the housing markets that has been put in place will be allowed to fade as the market recovers and fully stabilizes,” Geithner said.
Both entities are mandated to provide crucial financing to sustain liquidity for the widespread purchases of mortgage products by a range of borrowers.
In addition, regulatory reform and other supervisory actions by the Obama Administration will “clarify” the framework for new securitizations to “restart these important markets.”
Bringing the two companies under “conservatorship” by the Bush Administration, and maintaining that role now, were necessary steps before beginning a complete review and overhaul of Fannie and Freddie, Geithner said.
Before an overhaul plan is submitted to Congress, Geithner told lawmakers that the Treasury and Department of Housing and Urban Development (HUD) will submit a list of questions for public comments by next month, and seek responses from a variety of sources, including academics, market participants and consumer organizations.
No firm timetable was given for a reform proposal, but Geithner has indicated that administration officials will have at least an overhaul outline before year’s end.
The performance of Fannie and Freddie leading up to and during the housing finance crisis was symptomatic of the larger regulatory and oversight failure of the financial system, Geithner said.
The GSEs were allowed to expand and manage their investment portfolios “without regard to the risk they posed to the system,” he said.
“Over time, the GSEs were permitted to guarantee riskier mortgages and mortgage-backed securities,” Geithner said. “They were not required to hold adequate capital and employed inadequate risk management. “

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