Geithner Warns Against Eliminating Fed Role in Home Loan Support

Eliminating the government role in providing support for home loans could spell trouble according to Treasury Secretary Timothy F. Geithner.

Source: Source: Washington Post | Published on March 2, 2011

If the government has an extremely limited role in the housing market, as Republicans want, Geitner said it could have trouble ensuring that affordable mortgages are available during economic downturns. He said the government should continue to back low-down-payment loans for first-time home buyers.

Geithner's comments to members of the House Financial Services Committee came two weeks after the administration released a long-awaited white paper discussing options for overhauling the nation's mortgage system, which cratered during the recession.

Today, that system relies almost exclusively on federal support for funding new home loans - through the taxpayer-backed housing finance giants Fannie Mae and Freddie Mac and the Federal Housing Administration, which provides loans to home buyers without much money for a down payment.

The administration announced short-term steps to slightly reduce government support for housing - with the hope that banks will do more to provide mortgage funding - and offered three options for the longer-term overhaul of the housing market. All of the options eliminate Fannie and Freddie, but they differ on whether or how to replace them.

The first option retains the FHA but cuts off other federal support, not replacing Fannie and Freddie. The second and third retain the FHA and provide a new type of federal backing for a broader ranger of mortgages. One of those options ensures that affordable mortgages are available in times of crisis, and the other is designed to keep mortgage rates lower all the time.

Geithner discounted the first in an exchange with Rep. Maxine Waters (D-Calif.), who has expressed concern about withdrawing federal support for housing. The Treasury secretary said that cutting off nearly all federal involvement would leave the government unable to protect the economy or "innocent victims" during a sharp economic downturn.

A system with no government backstop would appear to protect taxpayers because there would be no explicit federal program to guarantee mortgages. But, he warned, that protection might not be so strong. If the government is not on the line for mortgages, he said, banks will be. And in a severe crisis, the government still must step in to protect the banking system, he said.

"It looks like it's a more private solution, but it may not be in the end," Geithner said.
Geithner has not explicitly endorsed any of the options. He said the second option - a government backstop for housing finance that is employed mainly during times of crisis - could fit within the FHA. But he said it would be difficult to specify when the government should step in.

Otherwise, he said, the Obama administration still strongly values the FHA and believes the government should make funding available to low- and moderate-income home buyers who can only put down "very modest" down payments.

Geithner said it was important that the administration and Congress move gradually with any reforms to the housing market. "It's going to take us a long time to repair the damage caused by the crisis," he said.

He said he'd like legislation to be in place within two years, but the eventual winding down of Fannie Mae and Freddie Mac and the creation of a new federal system for backing mortgages could take five to seven years.